2. What are Asset Management Companies?

In Pakistan, the companies that sell Mutual Funds are called Asset Management Companies. You must have come across names like Al Meezan Investments, UBL Funds, Bank Alfalah Funds or MCB – Arif Habib. These are names of some of the most prominent Asset Management Companies in Pakistan. All Asset Management Companies or AMCs are required to acquire license from and are regulated by the Securities and Exchange Commission Pakistan (SECP). Also, all AMCs are members of Mutual Fund Association of Pakistan (MUFAP). Just like the performance of stock market can be viewed at the Pakistan Stock Exchange (PSX) Website, performance of Mutual Funds can be seen at the MUFAP Website.

2.1. Key Terminology

  1. Units: Remember from Chapter 1 that a stocks is divided in to shares. Similarly, pieces of a Mutual Fund are called ‘units’ and individuals who buy these units are called ‘unit holders.’
  2. Portfolio: A portfolio is a basket of securities. A mutual fund can be described as a ‘portfolio’ of securities such as stocks, cash, gold and commodities. The composition of a portfolio varies with the purpose of the mutual fund.
  3. Redemption: Redemption is simply sale of units or shares of a Mutual Fund. The price at which an investor will redeem his/her shares is called the Net Asset Value.
  4. Open-ended Mutual Funds: Suppose an AMC called Money X issues 100 shares of ‘Fund P’ for investors in Pakistan. The company was able to sell all 100 shares in the first week. After 2 weeks, Ali goes to Money X and asks for 10 shares of Fund P. Money X creates these 10 shares and sells them to Ali. After 4 weeks, Ali decides to sell 5 shares back to Money X and Money X repurchases those from him. Such a Fund is called an Open-ended fund because it can increase or decrease the number of shares or units based on investor demand.
    Investors can enter and exit as per convenience in Open-ended Mutual Funds. There are over 200 Open-end schemes in Pakistan.
  5. Load: It’s the fee that investors have to pay when purchasing or selling a unit of a Mutual Fund. If you pay a fee while purchasing a unit, it’s called an ‘entry or front-end load.’ On the other hand, you pay an ‘exit or back-end load’ at the time of sale of units.
    Suppose Ali is interested in investing Rs. 10,000 in a fund. A front-end fee of 2% means that Ali will have to pay Rs. 200 for buying units of this fund. Thus, only Rs 9,800 (not Rs. 10,000) will be invested in the fund.
    Now suppose that you invested Rs. 10,000 in a fund. This amount has now increased to Rs. 20,000. You are now interested in selling all units of this fund. A back-end load of 2% means that you will have to pay a fee of Rs. 500 (2% of 20,000). Therefore, you will only receive Rs. 19,600 and not 20,000. Generally, Mutual Funds require you to pay only one type of fund i.e. either back-end or front-end.
  6. No-Load: A no-load fund is one that charges neither the front-end fee on purchase of units nor the back-end fee on sale of units.
  7. Reinvestment: In Mutual Funds, Investors are given an option to either cash out or reinvest their dividends. Let’s say Ali invested in a fund called Fund Z and got Rs. 500 in dividends. If he decides to reinvest them (and not cash) then the amount of Rs. 500 will be put back in the fund. The number of units held by Ali in Fund Z will increase proportionally.
  8. Redemption: Redemption is simply sale of units or shares of a Mutual Fund.
  9. Acquisition Cost: The cost of acquiring units of a mutual fund, including commissions and fees paid at the time of purchase.