If you are considering investing in mutual funds in Pakistan you will need to know, what they are, how they work and what you need to think about before taking the plunge. However, before you do decide to invest. It would worth going through the fundamentals of mutual funds in Pakistan.
What is a Mutual Fund?
As the name suggests, it’s a portfolio of stocks that is maintained and managed by a specific fund manager on behalf of its investors who have invested their money in a portfolio of stocks and securities called a mutual fund. Mutual fund provides an easy access to small investors to invest their money in a highly diversified portfolio of stocks professionally being managed by a Fund Manager. Dividends and returns achieved from mutual funds are then shared with its investors.
Currently Securities and Exchange Commission of Pakistan (SECP) is a regulator of mutual funds market in Pakistan and all the fund manager and asset management companies who maintain a mutual fund are registered with SECP in Pakistan. Both individuals and companies can invest in a mutual fund. There are five things that you should know that will form the basis of your research and understanding of the investing in best mutual funds in Pakistan.
1- Getting Started
So why would you consider investing in mutual funds? In a nutshell, it will save money and provide you with the opportunity to earn good returns that are often higher than other forms of investment in the long run and offer you little risk due to fund being managed by a professional asset management company (a fund manager). However, prior to making an investment, you need to understand what you goals are and how long you want to invest for. This will make it possible for you to select the best mutual fund that suits your needs. Mutual funds are generally used for more than three years although a longer investment term is often the preferred choice of investors.
Additional Reading: Start Investing Today Before it is too Late
2- Understand the Risks
There is an element of risk that comes with investing in a mutual fund wherever you invest, in Pakistan or in any other part of the world. There is a premium rewarded for taking the risk because investors are accepting that there is a risk because you could lose all or some of the amount that you have invested. Some of the common risks associated with mutual funds are Investment risks (due to overall market condition), political stability related risks and liquidity related risks that may result in a lack of ability to sell a stock quickly at better market rate.
In amongst the risks is one risk that is rather prominent and that is you. This is because it is important that you do not go chasing the best performing investments because often, this is what investors will do. It is important to remember that investing in mutual funds is not all about the thrill of it because it should be a long and drawn out process that means that you are in it for the long-haul.
3- It is All About Diversification
Mutual funds are a collection of investments because a single fund will invest in a wide range and large number of stocks, bonds and securities which are known as holdings. There are a number of mutual funds in Pakistan that are varied enough to the point where you can invest a large amount of your money but it is wide to spread the risk over a number of different mutual funds.
4- Understand Costs, Expenses and Payable Taxes
There are costs that come with selling and buying mutual funds and these can be classed as four different types.
i) A front loading mutual fund has costs that are charged up front. This amount could be as much as 5% of the amount you are investing.
ii) A back loading mutual fund will have the costs charged when the fund is sold. Again, the fee for this is usually around 3% to 5% and but it could drop over a period of time.
iii) A mutual fund that has load waived means that the fund does not have and front or back loading costs.
iv) There are many funds that do not charge loads but they all come with hidden expenses or underlying expenses. These can often be around 1.5% for stock mutual fund and this covers the costs associated with managing the fund.
5- Future Results are Not Governed by Previous Performance
Anyone who is considering investing in a mutual fund will look at how it has performed in the past prior to investing. It is worth delving into its history by going back as far as five to ten years to see how it really performs while comparing it to other funds in the same category will also help you to make a better decision. The manager in charge of the fund is also important and the time they have been in charge will also play a part in the decision.
As you can see, mutual funds in Pakistan can provides an excellent opportunity for starter investors with good returns but you need to understand the potential pitfalls and considerations before investing. A greater understanding will enable you to make informed decisions being as a wiser investor.
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