Most investors have parked their savings in risk-free money market and income funds through mutual fund companies, keeping their investment notably low in the riskier Pakistan Stock Exchange (PSX). This is despite the fact that the bourse has outperformed all assets, offering a historically high return on investment of 90% in the first 11 months of the outgoing fiscal year 2023-24.

The money market and income funds have offered returns on investment of up to 20%, according to the Mutual Funds Association of Pakistan (MUFAP). The assets under management (AUM) at the mutual fund companies soared to Rs2.41 trillion in March 2024, rising by 57.5% from Rs1.53 trillion in March 2023.

A large number of investors, mostly individuals, parked their savings amounting to Rs1.19 trillion in the money market (mostly in T-bills) through the asset management companies (AMCs) in March 2024. They made the second largest investment of Rs692 billion in income funds (instruments like Pakistan Investment Bonds/PIBs and term finance certificates/TFCs). They invested a total of Rs181 billion in equity (at companies listed at Pakistan Stock Exchange/PSX) in March 2024, which remained significantly low compared to the other assets.

While talking to The Express Tribune, National Investment Trust (NIT) Chief Operating Officer Manzoor Ahmed said a large number of investors have opted to invest in the money market, earning a guaranteed return of around 20-21% without taking the risk of losing investment in equity products at PSX and other riskier instruments.

To recall, the central bank’s key policy rate stands at a record high of 22% at present, giving investors the sense they would end up earning a handsome return from the money market. MUFAP’s infographics exhibit that investment in money market and income funds has continued to rise since the central bank resumed increasing interest rates in 2019 and 2020.

Ahmed said the PSX benchmark KSE 100 Index has soared to 76,000 points at present compared to around 40,000 in June 2023, offering a return of around 90%. “This is one of the historically high returns.”

MUFAP reported the return on investment in equity at 26.09% in March 2024. Ahmed said, “This is (however) one of the happenings that the stock market has maintained the record-breaking spree for quite some time despite the interest rate remaining at historical highs.” Historically, the stock market has underperformed amid high-interest rates and vice-versa, he recalled.

He said investors have poured the second largest investment into income funds. The instruments of income funds are like PIBs and TFCs, which are long-term money market instruments. Again, on behalf of the investors, mutual fund companies have heavily invested in the long-term income funds on the outlook that the central bank would soon start the cycle of cutting interest rates. Despite expected cuts in the policy rate, the return from income funds would remain handsome at around 15% going forward, Ahmed said.

He said investors are making new investments in equity (at PSX) these days on the outlook that interest rates would go down soon. “The funds in equity are expected to ramp up as the market (PSX) may cross the 80,000 or 90,000 points threshold ahead of securing the next International Monetary Fund (IMF) loan programme and projected investment coming from friendly countries like Saudi Arabia, UAE, and Qatar.”

Shariah-compliant instruments

Another trend suggests people are quickly migrating investments into Shariah-compliant instruments through mutual fund firms from conventional ones. Infographics suggest the Shariah-compliant investment would overtake the conventional one in a matter of a few months or in less than a year.

MUFAP reported the investment in Shariah-compliant instruments stands at Rs1.15 trillion compared to Rs1.18 trillion in conventional products, suggesting a ratio of 49:51 respectively in March 2024. The ratio stood at 45:55 in 2023 and 39:61 in 2022.

Overseas investors have doubled their investment through mutual fund companies to over Rs4.03 billion in March 2024 compared to Rs2.05 billion in March 2023. The investment through digital accounts crossed over Rs8 billion in the month under review compared to Rs1.84 billion in the same month of the last year.

The major investors through mutual funds are individuals and others (including public limited companies, associated companies, and fund of funds). They have invested a total of Rs926 billion and Rs941 billion, respectively. Among other investors through the mutual fund companies are banking and financial institutions (FIs), provident funds, gratuity funds, and pension funds.

Published in The Express Tribune, May 29^th, 2024.

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