If you’re looking for ways to grow your wealth and secure your financial future, investing your money is a great option. But with a plethora of investment options available, it can be challenging to determine where to begin. Luckily, investing in mutual funds is an excellent starting point. Over time, mutual funds have gained popularity in Pakistan thanks to their potential for long-term growth and diversification.

In this article, we’ll dive into the benefits of mutual funds in Pakistan and explain how they can help you maximize your investment potential. By the end, you’ll have a better understanding of why mutual funds are an excellent choice for anyone looking to invest in Pakistan.

Mutual funds are a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, and other securities. According to the Mutual Funds Association of Pakistan (MUFAP), the mutual fund industry in Pakistan has grown substantially over the past few years. As of March 2023, the industry’s assets under management (AUM) stood at PKR 1,535.9 billion, a growth of 35.5% YoY.

The growth in the mutual fund industry in Pakistan is not unique to the country. According to a report by the Investment Company Institute (ICI), the global mutual fund industry’s assets under management grew to $71.1 trillion at the end of 2021. The growth in the industry is a testament to the benefits of mutual funds for investors worldwide.

The current economic situation in Pakistan makes them an even more attractive investment option. The State Bank of Pakistan has increased the interest rates to 21%, the highest in Asia, in its efforts to curb hyperinflation in the country. This is an ideal opportunity for new and seasoned investors to invest in mutual funds and start earning up to 20% from low to medium-risk fixed-income mutual funds.

One of the most significant benefits of investing in mutual funds is diversification. As mentioned earlier, mutual funds invest in a diversified portfolio of securities, reducing the risk of any one investment significantly. In addition, mutual funds are managed by professionals who have the expertise and experience to make informed investment decisions. This is especially important for novice investors who may not have the knowledge or experience to make sound investment decisions on their own.

Another benefit of mutual funds is liquidity. Unlike other investments, such as real estate or fixed deposits, mutual funds can be bought and sold easily, making them a more flexible investment option. In addition, mutual funds offer investors the opportunity to invest in a range of asset classes, including stocks, bonds, and money market securities, depending on their investment objectives and risk tolerance.

In addition to their numerous benefits, mutual funds are accessible to everyone, regardless of their investment size. You can start your investment with as low as Rs 5000, making it an affordable option for investors. Moreover, their easy onboarding process, which can be done through a quick online sign-up, makes mutual funds a convenient investment option for anyone looking to get started with investing.

In conclusion, the mutual fund industry in Pakistan has grown substantially over the past few years, offering investors a diverse range of investment options. The benefits of mutual funds, such as diversification, professional management, and liquidity, make them a compelling investment choice for investors looking to maximize their investment potential in Pakistan. As with any investment, it’s essential to do your research, understand your investment objectives and risk tolerance, and consult with a financial advisor before investing in mutual funds.

Continuing with our over twenty-five years tradition of leading product innovation, we are once again set to launch Pakistan’s first Smart Beta Exchange Traded Fund –  JS MOMENTUM FACTOR ETF!

2021 has been a banner year for tech disruptions that are redefining business models across different industries. When we talk about the investing industry, Exchange-Traded Funds (ETFs) have been one of the most disruptive forces in recent years. However, it’s the Smart Beta ETFs that have taken the investing arena by storm in the last two years and have accumulated over $1 trillion of investments globally.

What is Smart Beta?

Smart beta is a rules-based portfolio-building process that systematically selects, weights, and rebalances portfolio holdings based on factors or characteristics versus a market capitalization approach. Smart Beta & Factor Investing strategies have been developed by academic experts and practitioners to address the limitations of traditional indices. Active equity mutual funds typically allocate money to companies by combining sectors that will perform corresponding to the prevailing economic cycle. Smart Beta and Factor Investing funds diversify differently, these funds tilt exposure towards ‘factors’ that have been proven historically to capture market inefficiencies. In other words, Smart Beta indices incorporate diversified exposures to various sources of equity returns.

Why Smart Beta?

We are indeed charmed by the success and growth of factor investing and feel industry is mature enough to think beyond sector rotation and theme investing. We also strongly believe that our markets offer tremendous opportunities to gain from factor risk premia such as Momentum, Volatility, Small Cap, or Dividend Yield. More importantly, however, when you hear the buzz like active managers have failed to impress investors or see data that shows 60% of active fund managers have underperformed the benchmarks (KSE-100/KMI-30) over the last ten years, you know that there is a lot to be done on this side of the world. Enigmatically, managers that consistently outperform or are true to the label are difficult to find. Over the past 3 years and even 5 years, we’ve observed equity funds that were in the top quartile of their performance, failed to sustain it through the subsequent quarters. Out of 38 equity funds, only 5% of the funds managed to maintain performance in the top quartile for over 1 year and none of the funds were able to maintain it for 2 years. (Yes including ours!)

Making investment decisions in an increasingly data-driven world with ever growing intricacies of size/speed and nature of information is becoming difficult. Smart beta ETFs would pave the way to a durable investment style that displays both active and passive investment management features. It follows a consistent portfolio construction methodology and rebalancing, which we believe improves portfolios’ overall risk-return characteristics that aim to provide exposure to persistent drivers of performance and deliver attractive risk-adjusted returns, enhanced efficiency, and transparency.

Why Momentum?

Factors can include dividend yield, momentum, value, size, and volatility and each will perform differently depending on the market and economic cycles so why did we choose to create an index based on a single factor ‘Momentum’.

Well, momentum is persistent. Further, very often we hear the word Speculative stocks used in our markets that have harmed our financial markets from growing and frightened our small investors from wealth creation. We perhaps underestimate the skill of stock pickers who deal with a rapidly expanding information base, conduct due diligence, and take a calculated risk in a turnaround story or change industry dynamics by being ahead of the rest.

The momentum index combines the skill of all such managers and packages in a portfolio that tracks this skill set. In other words, the index invests in trend stocks through a program-driven decision-making tool and is an alternative for investors who were broadly divided into active and passive investing worlds by modeling fundamental measures of size, dividends, cash flow, and/or variance.

Although the evidence for momentum is supported by almost two decades of academic research in US equities as well as markets outside the U.S, our backtests reveal that momentum has also outperformed our local stock index i.e. KSE-All-share index by 6% annualized over 2001 – 2021. Over this period the KSE All Share has returned 19% p.a. Momentum has delivered attractive Sharpe ratios (risk-adjusted returns) as well, the backtest reveals the strategy has a Sharpe ratio of 1.59 vs. 1.25 for the KSE All Share index.

However, I would urge you to keep in mind that evaluating the success or failure of the strategy on how the ETF trades in the first few weeks is not an indicator of future performance. Like any stock traded on a public market, you cannot evaluate the strategy performance over the short term. If you want to gauge the success of ETF over the long term, then it’s better to look at the performance of a minimum of 3 years else you can trade in short cycles.

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We would like to celebrate the ETF launch as a monumental milestone. We believe it will pique investor interest – be it the first-time investor or a seasoned investor in PSX. This fund is not the end of the road but the way to take the ETF journey towards the next stage of growth in Pakistan, and help investors understand the value of combining passive and active investing styles. JS-Momentum Factor ETF is just the beginning!

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Author:

Ms. Iffat Zehra Mankani 

Chief Executive Officer 

JS Investments Limited

 

 

Disclaimer: All investments in Exchange Traded Fund are subject to market risks. The investors are advised in their own interest to carefully read the contents of offering document in particular the investment policies mentioned in clause 2.2. Risk Factors mentioned in clause 2.7 and warnings in clause 10 before making any investment decision.