An asset management company, as a fund manager, invests money from investors in a mutual fund, which is a collective investment plan that specializes in pooling money from investors to invest in securities such as equities, bonds, money market instruments, and other assets. One of the primary benefits of mutual funds is that they provide small investors with access to professionally managed, diversified portfolios of equities, debt instruments [such as Term Finance Certificates (TFCs) and government securities], and other securities that would otherwise be difficult (if not impossible) to create with a limited amount of capital. The income generated by these assets, as well as the capital gains obtained, are distributed to unitholders in proportion to the number of units they own. Mutual funds are divided into two types: open-ended and closed-ended funds.
These funds have a fixed number of shares like a public company and are floated through an IPO. Once issued, they can be bought and sold at the market rates in the secondary market (Stock Exchange). The market rate is announced daily by the stock exchange.
Structure of Asset Management Companies
Asset Management Companies (AMCs), which are public limited companies incorporated under the Companies Ordinance of 1984, manage mutual funds. The AMC establishes new funds by establishing a Trust Deed between the Asset Management Company and the Trustee, with the SECP’s approval under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the “Rules”). The Trustee is in charge of the Fund’s assets and acts as a custodian. The trustee ensures that the Fund Manager makes investment decisions that are consistent with the mutual fund’s investment philosophy. Banks and central depository corporations approved by the SECP can function as trustees under Pakistani law. Most of the monies in the business are currently held in trust by the Central Depository Company of Pakistan (CDC). The Securities and Exchange Commission of Pakistan (SECP) oversees the mutual fund business and is quite strict when it comes to awarding licenses to fund management firms, particularly in the case of Collective Investment Schemes (CIS). The SECP also monitors mutual funds on a continual basis through reports that mutual funds are required to file with the SECP on a regular basis. SECP also performs on-site inspections of the AMCs.
The process of putting together an institutional or individual portfolio with the best possible mix of assets from various asset types. As markets fluctuate, or as the conditions of an investor’s personal and financial status change in the case of an individual portfolio, the portfolio will be rebalanced over time.
How do Mutual Funds determine their Unit Price?
The price per unit of a fund is represented by its Net Asset Value (NAV). The NAV is calculated by dividing the market value of assets held in a Fund’s portfolio, fewer liabilities, by the number of units outstanding.
NAV = Total Number of Outstanding Units – Current Market Value of All Assets – Liabilities
The unit’s sale price is determined by adding the sales load to the NAV. The NAV will be the sale price as well as the redemption price if there is no sales load. The sale and redemption prices are announced by the Funds on a daily basis and are available on their websites.
Fees and expenses
Fees and expenses are paid by investors in all mutual funds. These expenses are significant since they affect the investment return; as a result, investors must assess their returns after deducting all such expenses. The fees and other charges are normally stated in the offering paperwork and fund brochure prepared by the Asset Management Company. Management fees and load charges are the two types of fees that most people are familiar with. For providing office space and professional management, including all accounting and administrative services, management fees are established as a fixed percentage of the average net assets handled by the business. The second group includes sales commissions, which are referred to as “front-end loads” (sales charges applied at the time of purchase) or “back-end loads” (sales charges when you sell). As the name implies, “no-load” funds have no front-end or back-end sales costs. These charges cover the costs of distributing and selling the funds.
Taxation on Unit Holders
Dividend income received from a mutual fund (excluding the amount of dividend paid out of capital gains on listed assets) is liable to Income Tax as follows: Public Corporation and Insurance Corporation 5% of the total. If any other person, including a non-resident, receives it, 10% of the total Capital gain on the sale of mutual fund units is exempt from taxation until capital gain on the sale of securities listed on stock exchanges is exempt from taxation.
Unitholders of mutual funds, other than companies, are entitled to a tax credit under section 62 of the Income Tax Ordinance, 2001, on the purchase of new units because the funds are listed on stock exchanges. The tax credit amount is the lesser of (a) the amount invested in the acquisition of new units, (b) 20% of the unit holder’s taxable income, or (c) Rupees One Million (PKR.1,000,000) and is computed by applying the unit holder’s average tax rate for the tax year. The amount of tax payable for the tax year in which the units are disposed of is raised by the amount of credit permitted if the units are disposed of within twenty-four months.