Assets under mutual funds triple in three years

Equity share still far below 40-50% levels seen during past market cycles

KARACHI:

Pakistan's mutual fund industry has recorded a sharp expansion over the past three years, with assets under management (AUM) tripling amid strong domestic inflows, capital market gains and a gradual shift from fixed-income products to equities.

Data compiled from the Mutual Funds Association of Pakistan (MUFAP) shows that total AUM posted an 11% year-on-year growth in December 2025, underscoring the growing role of local institutional investors in supporting the capital markets. The rapid growth in AUM has coincided with a sustained rally in the equity market and improving macroeconomic stability.

According to JS Research, the expansion in mutual fund assets has enabled the equity market to absorb sustained foreign portfolio outflows while supporting a broad-based re-rating of valuations. Over the three-year period from 2022 to 2025, the KSE-100 Index delivered a cumulative return of 331%, a performance that analysts partly attribute to strong participation by mutual funds and individual investors.

Within total AUM, equity-oriented investments have grown at a markedly faster pace than debt. During calendar year 2025, investments in equity portfolios increased by 56%, while allocations to debt portfolios, including income, fixed-income and money market funds, rose by only 5%. As a result, equity's share in total mutual fund AUM climbed to 15% in December 2025, compared with a low of around 10% in December 2023.

This shift reflects changing relative returns across asset classes. A sharp easing in monetary conditions has reduced the attractiveness of fixed-income instruments. Since December 2023, the policy rate has been cut cumulatively by 1,150 basis points, while three-year Pakistan Investment Bond (PIB) yields have declined by about 630 basis points. In parallel, the latest federal budget increased taxes on fixed-income investments, further tilting investor preferences towards equities.

Despite the recent increase, analysts note that equity exposure within mutual funds remains well below historical peaks. During the 2016-18 period, equities accounted for 40% to 50% of total AUM, compared with the current 15%. This gap suggests there is still room for further reallocation towards equities if macroeconomic conditions remain stable and corporate earnings continue to improve.

The growing pool of domestic liquidity has also played a critical role in stabilising the market during periods of foreign selling. In calendar year 2025, foreign portfolio investors recorded net outflows of approximately $370 million. These outflows were more than offset by the combined net buying of around $561 million by mutual funds and individual investors. Mutual funds alone accounted for net equity purchases of about $298 million during the year.

This trend has continued into the early part of 2026. Year-to-date data shows foreign investors have remained net sellers, with outflows of roughly $53 million, while mutual funds posted net inflows of about $92.5 million. Analysts say this marks a structural shift in market dynamics, with domestic institutions increasingly acting as the primary shock absorbers against external volatility.

Ample domestic liquidity has also supported a sustained improvement in market valuations. The price-to-earnings (P/E) multiple of the JS Research universe rose from about 3.5 times in December 2023 to around 8 times by December 2025. While valuations have already re-rated significantly, JS Research believes there is further upside potential, particularly if earnings growth remains intact and macro risks continue to recede.

Market participants view the expansion of the mutual fund industry as a positive structural development for Pakistan's capital markets. A deeper domestic investor base reduces reliance on volatile foreign flows and improves price discovery and market depth. However, analysts caution that sustaining growth will depend on consistent policy signals, further financial sector reforms and continued efforts to broaden retail participation.

The tripling of mutual funds' AUM over the past three years highlights a notable transformation in Pakistan's investment landscape, with domestic savings increasingly channelled into capital markets and equities emerging as a more prominent asset class within managed portfolios.