Where are the investors going?

Activity in Pakistan’s largest stock market is at its lowest in nine years and although this is an alarming figure, the real question is: where did all the investors go?

At least some of them have switched to mutual funds as the local industry has appreciated by 6.4 per cent over the last two months, according to Mazhar Sabir, a mutual funds analyst at Invest Capital and Securities Limited. “There is enough attraction in the mutual funds industry to lure investors and increase its size,” he asserted.

Since the announcement in July that the Capital Gains Tax (CGT) will apply on equities, investors have been redirecting resources towards mutual funds, especially the ‘income’ and ‘money market’ categories. The CGT was imposed on the stock market in July.

As per the new regulations, 10 per cent capital gains tax will be implemented on the holding of stocks up to six months, while 7.5 per tax will be recovered on stocks held up to 12 months.

If there are 10 people willing to invest in the market today, at least four of them will eye mutual funds, said Sabir. “The CGT is not imposed on money market and income funds since 90 per cent of the profits are distributed to investors,” informed Sabir.

The growth of mutual funds had been rising up until 2007 but dropped from 2008 as people opted to pull their money out after the stock market crash and the global economic crisis, highlighted Sabir.

In 2008, the KSE-100 index lost 4,000 points or nearly a quarter of the stock values in 26 trading sessions.

Money market and income fund category to grow

Investors have shifted towards money market and income fund growth categories as they are moving towards short-term instruments, said Sabir. “Income and money market funds might be investors’ first choice in the near future because of the tax benefits.”

Equity category

In equity funds, the mix of investments is such that no sector has more than 30 per cent share of the total funds. For example, the Oil and Gas Company Limited (OGDC) has a share of around 25 per cent in the stock market but the mutual funds industry does not invest more than 15 per cent in order to keep the basket balanced, informed Sabir.

“The only drawback to this is that if OGDC, a heavyweight, performs well in the stock market the fund will not completely reflect this surge,” he added.

He shared that the latest type of fund introduced in the market is the commodities category gold fund offered by KASB. However, he concluded: “The launch of any new commodity fund is not likely as the Securities Exchange Commission of Pakistan (SECP) paperwork is too lengthy.”

Published in The Express Tribune, September 20^th, 2010.