Business

An alternative to financing investment

For individual investors mutual funds provide numerous benefits.

Ali H Shirazi August 31, 2010

Warren Buffet is a prescient man. In his annual letter to shareholders of Berkshire Hathaway on March 8, 2003, he wrote: “Derivatives are financial weapons of mass destruction carrying dangers that, while now latent, are potentially lethal." After the subprime mortgage bubble burst in 2007, the esoteric credit default swaps which insured against default of securities tied to sub-prime mortgages, collapsed. That brought the downfall of Lehman Brothers and pushed the American International Group (AIG) to the brink.

Mutual funds on the other hand are a product of the masses, for the masses. They have withstood the pressures of the financial crisis and global assets under management have now started rising again. They play an integral role in the world of finance, a force that has powered the middle class growth, provided depth to capital markets and added dynamism to many economies. Long just a peripheral player in the world of capital markets, the mutual fund industry now commands the stage with $23 trillion in assets under management.

Yet, mutual funds are not appreciated by our policy-makers. They at best considered them to be obscure products designed for wealthy individuals and large corporations. The fact is that mutual funds can serve Pakistan’s economy as an important component of growth.

For individual investors mutual funds provide numerous benefits: access to professional investment management, diversification of funds in various asset classes, tax credit of up to Rs300,000, ability to invest for as little as Rs5,000, liquidity offered by open end funds and transparency. More significantly, through individual investors, they have the ability to change the workings of the marketplace itself. As the number of retail investors grows, the depth of Pakistan’s capital market will increase and in time individuals and not a handful of corporations will influence the market.

Savings are essential to the well-being of individuals as well as Pakistan’s ailing, debt-ridden economy. Our savings-to-GDP ratio of 10 per cent is the lowest in the region. India’s savings rate has now touched 30 per cent. We have a weak capital market and foreign aid, IMF loans are no substitute for domestic savings and investment. An essential condition for financial savings is a capital market that can provide accessible and economical instruments, such as mutual and pension funds, to enhance savings. Only savings will ensure sustainable, long-term growth.

A holistic, long-term approach is required to bring about the necessary reforms in Pakistan. Encouraging the growth and promotion of pension, insurance and mutual funds will go a long way in creating depth of our capital market and providing a source of credit for government and private enterprises alike. Financing needs of large infrastructure projects, such as dams and motorways, should be met via the capital markets. It is the capital market which must finance economic development and it is the capital market which should channelise people’s savings into such investments.

Published in The Express Tribune, September 1^st, 2010.

COMMENTS (7)

Shemrez Nauman Afzal | 14 years ago | Reply @Mohammad tauseef: Thank you for sharing these valued experiences with us for reference.

Mohammad tauseef | 14 years ago | Reply Stick to your jobs Salaried guys. Dont pick up with your immediate boss even if he's a jerk. Dont complain too much. Be more vigilant. There is gonna be tough times ahead.

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parvez | 14 years ago | Reply Academically a sound article. What is missing is that to enable financial instruments to work in this country, a credible and safe environment is required and this sadly is missing.

Shemrez Nauman Afzal | 14 years ago | Reply I concur with Mr. El-Edroos; just because there is still room for improvement does not automatically imply that there is an 'enabling environment' to capitalize on such improvement, or that 'rules of the game' have been established for the private sector to engage the market. Nevertheless, small investors can perform the same role for Pakistan that small business-owners have done for the U.S. Pakistan has remained historically deficient vis-a-vis its Savings ratios and Tax-to-GDP ratios, and this critically damages any gains made in the macroeconomy, and inhibits the translation of overall gains into microeconomic prosperity for the average consumer (or the average Pakistani). Yet savings alone cannot ensure long-term economic growth that is macroeconomically sustainable and microeconomically efficient. Pakistan requires the establishment of infrastructure and credibility of functional public-service institutions as a key component of the quality of life, and must also introduce measures of basic economic security for those segments of the population who are totally without social safety nets. Sustainable economic growth in Pakistan must not only account for endemic corruption and systematic laziness, but also the impact (and response) of the natural environment and the terms of trade that we experience/enjoy with the rest of the world. It is a valid notion that aid-not-trade is also to blame for Pakistan's economic woes and its continued incapacity to "stand on its own two feet" when it comes to international economic/commercial competition. Savings must happen, indeed. But local capital must also be utilized and effectively channeled. It is all about energizing the local economy - whether it is the factors or the actors. Please note that I am talking about local Pakistani investors, whether they are rich and own a Prado, or whether they are employed on monthly wages. Hence, I chose to read Mr. Shirazi's article under the impression that all these measures must be undertaken by economic actors in Pakistan - economic agents such as you and I, and the man on the street. Unless and until we start owning Pakistan ourselves, someone from abroad is going to come and steal it from under our noses (hint hint). In this context, I am unaware of what Mr. El-Edroos means by "investor trust" - does the average Pakistani not trust the Pakistani economy? Then why does he or she engage (within whatever limits) with the Pakistani economy? There is only so far the the Government can go. I believe the people of Pakistan should assert their rightful ownership of the national economy, rather than allow the government to institute irrational and market-unfriendly policies, rules, regulations and equilibria. This will be the first building block towards providing an enabling and trustworthy environment where investment in the local economy can take place, and where the concept of Savings will acquire more instrumental importance.

Shemrez Nauman Afzal | 14 years ago | Reply I concur with Nadir. Just because there is still room for improvement does not automatically imply that there is an 'enabling environment' to capitalize on such improvement, or that 'rules of the game' have been established for the private sector to engage the market. Nevertheless, small investors can perform the same role for Pakistan that small business-owners have done for the U.S. Pakistan has remained historically deficient vis-a-vis its Savings ratios and Tax-to-GDP ratios, and this critically damages any gains made in the macroeconomy, and inhibits the translation of overall gains into microeconomic prosperity for the average consumer (or the average Pakistani). Yet savings alone cannot ensure long-term economic growth that is macroeconomically sustainable and microeconomically efficient. Pakistan requires the establishment of infrastructure and credibility of functional public-service institutions as a key component of the quality of life, and must also introduce measures of basic economic security for those segments of the population who are totally without social safety nets. Sustainable economic growth in Pakistan must not only account for endemic corruption and systematic laziness, but also the impact (and response) of the natural environment and the terms of trade that we experience/enjoy with the rest of the world. It is a valid notion that aid-not-trade is also to blame for Pakistan's economic woes and its continued incapacity to "stand on its own two feet" when it comes to international economic/commercial competition. Savings must happen, indeed. But local capital must also be utilized and effectively channeled. It is all about energizing the local economy - whether it is the factors or the actors. Please note that I am talking about local Pakistani investors, whether they are rich and own a Prado, or whether they are employed on monthly wages. Hence, I chose to read Mr. Shirazi's article under the impression that all these measures must be undertaken by economic actors in Pakistan - economic agents such as you and I, and the man on the street. Unless and until we start owning Pakistan ourselves, someone from abroad is going to come and steal it from under our noses (hint hint). In this context, I am unaware of what Mr. El-Edroos means by "investor trust" - does the average Pakistani not trust the Pakistani economy? Then why does he or she engage (within whatever limits) with the Pakistani economy? There is only so far the the Government can go. I believe the people of Pakistan should assert their rightful ownership of the national economy, rather than allow the government to institute irrational and market-unfriendly policies, rules, regulations and equilibria. This will be the first building block towards providing an enabling and trustworthy environment where investment in the local economy can take place, and where the concept of Savings will acquire more instrumental importance.

Isfand | 14 years ago | Reply I advice to ppl to invest in Gold and silver or real estate,only this year(july 2009-july 2010) Gold showed increase in value of 39%.

Syed Nadir El-Edroos | 14 years ago | Reply As the recent past has shown, mutual funds, pension funds and other financial vehicles are far from perfect,and the notion of encouraging their promotion in Pakistan as littered with risk. Most importantly the regulatory framework is so weak, and easily manipulated by larger players, encouraging small investors to take up new products where conventional products, such as trading on the stock exchange have a questionable record in protecting the interests of small investors. In theory the idea holds alot of merit, though in practise until the interests of all players are recognized, such products will neither garner investors trust, or worse remain a source of wealth accumulation and tax evasion for the rich of the country.

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