MUTUAL FUNDS.

Term report: FINANCIAL INSTITUTIONS.

Jahanzeb Nazar
9381.
Table of Contents
MUTUAL FUNDS..........................................................................................................................................2
TYPES OF MUTUAL FUNDS.......................................................................................................................3
MUTUAL FUND SHARE PRICING...............................................................................................................3
BENEFITS AND COST OF INVESTING IN MUTUAL FUNDS.........................................................................4
REGULATION AND TAXATION...................................................................................................................4
PERFORMANCE AND COMPARISON.........................................................................................................4
ANALYSIS AND REPORTING......................................................................................................................5
Mutual funds in Pakistan:............................................................................................................................6
Mufap......................................................................................................................................................8
An interview:...........................................................................................................................................9
The top 10 providers of mutual funds...................................................................................................12
What Is Diversification?.........................................................................................................................15
Diversification and you:.........................................................................................................................15
Diversification and mutual funds:..........................................................................................................15
Money Market Fund..........................................................................................................................16
Income Funds....................................................................................................................................16
Income and Growth Funds.................................................................................................................17
Growth and Income Funds.................................................................................................................17
Balanced Funds..................................................................................................................................17
Growth Funds....................................................................................................................................17
Index Funds.......................................................................................................................................18
Sector Funds......................................................................................................................................18
Specialized Funds...............................................................................................................................19
Islamic Funds.....................................................................................................................................19

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 MUTUAL FUNDS
Mutual funds belong to a group of financial intermediaries known as investment
companies, which are in the business of collecting funds from investors and pooling them for
the purpose of building a portfolio of securities according to stated objectives. They are also
known as open-end investment companies. Other members of the group are closed-end
investment companies (also known as closed-end funds) and unit investment trusts.
Mutual funds are generally organized as corporations or trusts, and, as such, they have a
board of directors or trustees elected by the shareholders. Almost all aspects of their operations
are externally managed. They engage a management company to manage the investment for a
fee, generally based on a percentage of the fund's average net assets during the year. The
management company may be an affiliated organization or an independent contractor. They sell
their shares to investors either directly or through other firms such as broker-dealers, financial
planners, employees of insurance companies, and banks. Even the day-to-day administration of
a fund is carried out by an outsider, which may be the management company or an unaffiliated
third party.
The management company is responsible for selecting an investment portfolio that is
consistent with the objectives of the fund as stated in its prospectus and managing the portfolio
in the best interest of the shareholders. The directors of the fund are responsible for overall
governance of the fund; they are expected to establish procedures and review the performance
of the management company and others who perform services for the fund.
Mutual funds are known as open-end investment companies because they are required
to issue shares and redeem (buy back) outstanding shares upon demand. Closed-end funds, on
the other hand, issue a certain number of shares but do not stand ready to buy back their own
shares from investors. Their shares are traded on an exchange or in the over-the-counter
market. They cannot increase or decrease their outstanding shares easily. A feature common of
both mutual funds and closed-end funds is that they are managed investment companies,
because they can change the composition of their portfolios by adding and deleting securities
and altering the amount invested in each security. Unit investment trusts are not managed
investment companies like the mutual funds because their portfolio consists of a fixed set of
securities for life. They stand ready, however, to buy back their shares.

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TYPES OF MUTUAL FUNDS

There are four basic types of mutual funds: money market, stock (also called equity), bond, and
hybrid. This classification is based on the type and the maturity of the securities selected for
investment. Money market funds invest in securities that mature in one year or less, such as
Treasury bills, commercial paper, and certificates of deposits. They are often referred to as
short-term funds. Stock, bond, and hybrid funds invest in long-term securities, and as such are
known as long-term funds. Hybrid funds invest in a combination of stocks, bonds, and other
securities.
Mutual funds also differ in terms of their investment objectives, as outlined in their
prospectuses. The ICI classifies mutual funds into thirty-three investment objective categories.
The main investment objectives within the stock funds include capital appreciation, total return,
and world equity. Within each of these objectives, there are subcategories. There are two
groups of bond funds: taxable bond funds and tax-free bond funds. Main categories in taxable
bond funds are corporate bond funds, high-yield funds, world bond funds, government bond
funds, and strategic income funds. The main tax-free bond fund categories are state municipal
bond funds and national municipal bond funds. Among money market funds, there are also
taxable money market funds and tax-exempt money market funds. As in the case of stock funds,
many subcategories exist within each main category of bond and money market funds. In
addition to these, there are specialty or sector funds, which invest in a particular segment of the
securities market. Examples include biotechnology funds, small-company growth funds,
technology funds, index funds, and social criteria funds.

MUTUAL FUND SHARE PRICING

By law, mutual funds are required to determine the price of their shares each business day. They
release their prices the same day for publication in the next day's newspapers. Daily prices of
mutual fund shares can also be obtained directly from the fund's offices or Web sites of
commercial venders of financial information.
The share price represents the net asset value (NAV) per share, which is the current
market value of a fund's assets net of its liabilities. The liabilities include securities purchased,
but not yet paid for, accrued fees, dividends payable, and other accrued expenses. The NAV per
share is obtained by dividing the NAV by the number of shares of the fund outstanding at the
end of the day. A buyer of mutual fund shares pays the NAV per share plus any applicable sales
load (also known as a front-end load). Sometimes, the sales load is collected when shares are
redeemed and is known as a back-end load. Funds that have a sales load are known as load
funds and use a sales organization to sell their shares for a fee. Funds that sell shares directly
and do not have a sales load are known as no-load funds. The sales load often differs from fund
to fund, and it is subject to National Association of Security Dealers (NASD) regulation. When an
investor sells a share, it is the NAV that the seller usually receives. Some mutual funds may
charge a redemption fee if the shares are held for less than a specified period.

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BENEFITS AND COST OF INVESTING IN MUTUAL FUNDS

Mutual funds provide investors with a way to diversify their investment under professional
management, which most investors may not be able to obtain on their own. Since the funds
operate with a large pool of money, the investors benefit from economies of scale, such as a
lower trading cost and a higher yield. Besides delivering attractive yields, many funds provide
their investors with such services as check-writing privileges, custody (as a service), and
bookkeeping. Investors also benefit from the knowledgeable investment choices of securities
and investment objectives that funds offer.
The cost to the shareholder of investing in mutual funds comes in various forms: front-
end loads, management fees, cost of maintaining and servicing shareholder accounts
(administrative cost), redemption fees, and distribution fees (also known as 12b-1 fees). As
mentioned before, a redemption fee is usually levied on shares held for less than a specified
period. A distribution fee is a charge on current shareholders to cover the costs of advertising,
promotion, selling, and other activities. It is sometimes combined with load charges. All these
expenses are aggregated to obtain a single measure of cost to the shareholder. An aggregate
measure commonly found in the published data is the expense ratio (expenses as a percent of
assets). This measure does not include sales load, if there is one.

REGULATION AND TAXATION

There rules governing mutual funds in Pakistan, include:

1. Investment Companies and Investment Advisors' Rules, 1971. (govern closed-end

mutual funds).
2. Asset Management Companies Rules, 1995. (govern open-ended mutual funds) Updated
information and details on these rules is available from the SECP

PERFORMANCE AND COMPARISON

The rate of return is widely used for comparing the performance of mutual funds. The rate of
return on a mutual fund investment for a period of one year, for example, is calculated by
adding the change in the NAV (NAVt–NAVt–1) to income and capital gains distributed during the
year and dividing the sum by the NAV at the beginning of the year. The following describes the
calculation of return for no-load funds:
where R, i, and c represent rate of return, income, and capital gains, respectively. For load
funds, the calculation of return must account for load charges by adding them to the NAV. The
performance of a mutual fund is often compared with the performance of a benchmark
portfolio that is selected to reflect the investment risk level of the fund's portfolio to see
whether the mutual fund had a superior performance.
The rate of return of a mutual fund with a NAV of $15.00 at the beginning of a year and
$15.50 at the end of that year, and distributed $0.75 and $0.50 per share as income and capital

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gain respectively during the year would be:
[($15.50 − $15.00) + $0.75 + $0.50]/$15.00 = 11.67%

ANALYSIS AND REPORTING

Key statistics pertaining to a fund—such as the NAV, offer price, sales charges, expense
ratio, and performance measure for various categories of funds—are regularly calculated,
analyzed, and published. Two firms well known for their analytical service are the Lipper
Analytical Services (Lipperweb.com) and the Morning Star Inc. (Morningstar.com). The Wall
Street Journal and Barron's carry the information supplied by Lipper Analytical Services on a
regular basis. Investment Company Institute (www.ici.org) also provides a wealth of information
on mutual funds, including historical data and Web site addresses of its member funds.

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 Mutual funds in Pakistan:
In Pakistan Mutual Funds were introduced in 1962, when the public offering of National
Investment (Unit) Trust (NIT) was introduced which is an open-end mutual fund. In 1966
another fund that is Investment Corporation of Pakistan (ICP) was establishment. ICP
subsequently offered a series of closed-end mutual funds. Up to early 1990s, twenty six (26)
closed-end ICP mutual funds had been floated by Investment Corporation of Pakistan. After
considering the option of restructuring the corporation, government decided to wind up ICP in
June, 2000. In 2002, the Government started Privatisation of the Investment Corporation of
Pakistan. 25 Out of 26 closed-end funds of ICP were split into two lots. There had been a
competitive bidding for the privatisation of funds. Management Right of Lot-A comprising 12
funds was acquired by ABAMCO Limited. Out of these 12, the first 9 funds were merged into a
single closed-end fund and that was named as ABAMCO Capital Fund, except 4th ICP mutual
fund as the certificate holders of the 4th ICP fund had not approved the scheme of arrangement
of Amalgamation into ABAMCO capital fund in their extra ordinary general meeting held on
December 20, 2003. The fund has therefore been reorganised as a separate closed-end trust
and named as ABAMCO Growth Fund. Rest of the three funds were merged into another single
and named as ABAMCO Stock Market Fund. So far as the Lot-B is concerned, it comprised of 13
ICP funds, for all of these thirteen funds, the Management Right was acquired by PICIC Asset
Management Company Limited. All of these thirteen funds were merged into a single closed-
end fund which was named as “PICIC Investment Fund”. Later on the 26th fund of ICP (ICP-
SEMF) was also acquired by PICIC Asset Management Company Limited. The certificate holders
in extraordinary general meeting held on June 16, 2004 approved the reorganisation of SEMF
into a new closed-end scheme renamed as PICIC Growth Fund. The Securities and Exchange
Commission of Pakistan subsequently authorised PGF on July 30, 2004. Initially there was both
public and private sector participation in the management of these funds, but with the
nationalisation in the seventies, the government role become more dominant. Later, the
government also allowed the private sector to establish mutual funds

Mutual Funds marched on the road to recovery during the period July – December, 2009 with
net assets showing an increase of 42%, i.e. increasing from Rs. 182 billion in January, 2009 to Rs.
258 billion in December, 2009. The total number of mutual funds stood at 116 in December,
2009 compared to 95 in January, 2009 substantiating an uptrend in the industry both in terms of
growth in net assets as well as number of mutual funds launched. Growth was primarily
evidenced in the categories of money market, income, and capital‐protected funds. This shift,
however, was anticipated especially keeping in view the fact that appetite towards risk had
subdued in the aftermath of the crisis that entangled the industry in late 2008, effects of which
carried forward till the first half of 2009. The net assets of the mutual fund industry amounted
to Rs 253 billion, as on 28th February 2010* as compared to Rs. 258 billion in December,
2009.The total number of mutual funds stood at 121 as at March 31,2010 compared to 116 in
December, 2009 substantiating marginal growth in the number of mutual funds launched.

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Despite the unprecedented financial turmoil, mutual fund industry in general withstood the
down turn
and successfully managed mounting redemption pressure by repaying in excess of Rs. 90 billion
to the
investors.

Snapshot of key financials as at March 31, 2010 (Rs. millions)

Leasing Investment Modaraba’s

Companies Banks

Total Assets 39,153 31,289 23,016

Total Liabilities 34,091 27,101 13,069

Total Equity 4,991 181 9 9,171

Total Deposits 3,553 10,808 4,151

Source: SECP

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Mufap

Mutual Funds Association of Pakistan (MUFAP) is the trade body for Pakistan’s multi billion
rupees asset management industry. The money our members manage is in a wide variety of
investment vehicles including stocks, bonds, money market instruments, government securities
and bank deposits. Our role is to ensure transparency, high ethical conduct and growth of the
mutual fund industry. MUFAP was formed in 1996 by Mr. Zaigham Mahmood Rizvi, ex-Chairman
and founder member, and was formally licensed in 2001 as a public limited company (by
guarantee) under Section 42 of the Companies Ordinance, 1984 by Ministry of Commerce
(MOC) and is thus a quasi legal entity. After the establishment of MUFAP in 1996, private and
foreign firms were allowed to float open-ended funds for the general public. This time also saw
the stock market’s performance scale new heights as a result of positive government policies
and incentives, registering a growth of more than 15 times in the net assets of the mutual funds
between 2000-2008. Mutual Funds were initially overseen by the Corporate Law Authority
(“CLA”) under its Securities Wing. The CLA, then a division of the Ministry of Finance, was
gradually transformed and made independent as the Securities and Exchange Commission of
Pakistan (“SECP”) as part of the Capital Market Development Program (CMDP) initiative of the
Asian Development Bank undertaken for Pakistan.

MUFAP’s role is to establish the essential codes and standards within the industry to ensure the
trust and confidence of investors and build the industry as a whole. MUFAP’s core objectives
encompass: 
1. Overseeing industry compliance under prescribed prudential standards;
2. Perform onsite supervision based on agreed criteria;
3. Conducting registration and testing/ examinations;
4. Developing cooperative programs with governmental agencies and industrial
organizations to resolve problems affecting investors;
5. Liaising between the industry and SECP and other concerned government bodies to
highlight and resolve issues affecting the mutual fund industry; and
6. Presenting budgeting proposals and other recommendations to the SECP for the
development of the industry.

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An interview:

Najam Ali, former Chairman, Mufap & CEO, JSABAMCO and discussed about mutual funds in
Pakistan.

Money: Would you like to give an introduction about funds management from capital market
perspective?

Najam Ali: Funds management is a process whereby you try to maximize gains for the investors
while minimizing the risk exposure. You select those securities (equity and fixed income) in your
portfolio which gives you a desired level of return both in terms of capital appreciation and/or
dividend income, depending upon your investment criteria.
Mutual fund manage funds by pooling together money provided by various investors for
investment into equity and fixed income markets with the objective to provide better relative
returns to investors compared to other savings and investment alternatives. The pool of funds is
managed on behalf of the investors by a team of specialized individuals, commonly known as
fund managers or investment advisors.

Money: How can you differentiate conventional investments in banks from investments in
mutual funds?

Najam Ali: One of the main differences is that Mutual Fund returns are tax-free returns whereas
conventional investments in banks are subject to 10% withholding tax which means in real
terms you get less than the quoted returns.
Other main advantages offered to Mutual Fund Open-End Fund holders is that they can redeem
their funds anytime they want too except for certain specialized funds (at the prevailing
Redemption price of the fund which is quoted on the daily basis), whereas in Banking Sector
you can’t withdraw your invested money before maturity without paying a penalty.
Moreover, investment banks generally offer fixed rates on Certificate of Deposits or
Investments; whereas mutual fund returns are variable; thus giving the investor the opportunity
to earn beyond expected returns.

Money: How can we encourage general public to invest in mutual funds?

Najam Ali: The general public can be encouraged to invest in mutual funds through investor
education and awareness campaigns through electronic and print media as well as through
seminars, workshops and conferences for wide scale public dissemination of information on
mutual funds. Once the public is aware of the advantages of investing in mutual funds
compared to the other types of conventional investments such as bank deposits they would
undoubtedly invest in mutual funds.

Money: Money: What is the impact of volatile stock market on Fund Managers?

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Najam Ali: Fund managers backed by strong research and risk management function uses
various tools and strategies to mitigate volatility in returns and provide better returns to
investors even in time of market volatility. The fund managers generally hold a medium to long
term perspective of the market and therefore may be subject to temporary fluctuations in
prices of stocks which tend to stabilize over the medium to long term.

Money: Money: Would you also like to highlight on portfolio management?

Najam Ali: Portfolio management is the art and science of making decisions about investment
(asset) mix and policy, matching investments to objectives, asset allocation for individuals and
institutions, and balancing risk vs. performance. Portfolio management is all about strengths,
weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs.
international, growth vs. safety, and numerous other tradeoffs encountered in the attempt to
maximize return at a given appetite for risk.

Money: What steps are taken by MUFAP to protect interests of its members?

Najam Ali: MUFAP has developed guidelines in the area of advertising and communications for
Asset Management, Investment Advisory Services & Mutual Funds in Pakistan to promote fair
competition among investment firms. The Standards are aimed at promoting a self regulatory
structure within the Mutual Fund Industry of Pakistan, which in turn, will ensure clarity, honesty
& integrity in all matters of advertising, marketing and promotions.
MUFAP has also adopted the CFA Institute Asset Manager Code of Professional Conduct. This
Code sets forth minimum ethical and professional standards for providing asset management
(including investment advisory) services to clients. The goal of this Code is to provide a useful
framework for all asset managers to provide services in a fair and professional manner and to
adequately disclose key elements of these services to clients
MUFAP is striving to achieve inter alia the following:
· To promote a cadre of well trained Agents and distributors and to implement a programme of
training and certification for all intermediaries and other engaged in the industry
· To promote best practices in the mutual fund industry
· To interact with the Government, Securities and Exchange Commission of Pakistan (SECP),
State Bank of Pakistan and other bodies on all matters relating to the Mutual Fund industry.

Money: Is there any impact of global funds sector on the Pakistani industry?

Najam Ali: Not much because international funds who come to Pakistan don’t exactly invest in
mutual funds, rather they invest in stocks directly, therefore I don’t see any direct link between
the two, however Pakistani mutual fund industry cannot remain isolated from developments
taking place internationally and is adapting the international trends and best practices.
Money: What are the current issues of funds management?

Najam Ali: 1. Inadequate regulatory framework to cater for new products and growing needs of
investors.

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2. Limited investment options.
3. Lack of awareness among the general public.

Money: How do you foresee the future of mutual fund sector in next ten years?

Najam Ali: The future outlook of the mutual funds industry is very promising and encouraging.
The industry holds several exciting opportunities for both corporate and individual investors
including the retired persons. These days, the mutual fund industry is generating keen interest
among a growing number of investors. It is attracting fund managers and leading players of
industrial and corporate sector as sponsors. Moreover, it has been providing versatile and
attractive investment avenues to the general public while paying comparatively better returns
based on dividend yields and capital gains. In the recent years, SECP has also taken a number of
steps to promote the development of mutual funds industry.
These measures envisage multifaceted reforms to help the industry in managing its risks
prudently, give operational autonomy, and reduce fragmentation as well as to protect investors’
interest. Comprehensive disclosure requirements at the time of public offering and subsequent
reporting on the affairs of funds have been prescribed and enforced. In addition, managers have
been given flexibility to establish their trusts or companies as well as to float equity, debt or
hybrid funds. The steps taken by the Securities and Exchange Commission of Pakistan (SECP) to
promote equity markets in general and mutual funds industry in particular are in line with
overall macro-economic policies of the government and will help boost investment in mutual
fund sector in years ahead.
I see the future bright ahead however there are challenges facing the industry such as stiff
competition among mutual funds, limited investment avenues and effective management of risk
due to the recently increased volatility in the markets.

Money: Do you have any support or are you looking towards the government to promote
mutual fund’s sector?

Najam Ali: Mutual Funds Association of Pakistan is playing a pioneering role in the promotion of
mutual fund sector in Pakistan by acting as a facilitator between the market participants and the
regulators. It disseminates essential information on various funds, the fund managers, the stock
market as well as the regulatory environment under which open and closed-end. MUFAP is also
striving to achieve the following:
· To enhance the professional and ethical standards in all areas of operation of Mutual Fund
industry to ensure that they are in line with international best practices
· To provide a centre of excellence for the development of knowledge and understanding of the
Mutual Fund industry
· To promote public understanding of mutual funds and engage in promotional activities to
ensure ongoing education of the public on Mutual Fund related issues.

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The top 10 providers of mutual funds

Following is the list of Pakistan's largest mutual fund providers. They offer to public to invest in
these mutual funds. In these providers include the companies of banking sector, non-banking
sector, insurance sector and finance sectors. There are 10 Top companies who are the providers
of mutual funds.

1st Al-Meezan Mutual Fund

Al Meezan Mutual Fund Limited (AMMF) was the first fund launched by Al Meezan Investments
and is one of the oldest mutual funds in the private sector. It is a closed end equity fund that
invests in Shariah compliant equity instruments to provide investors with Pure Profit. During its
long and illustrious journey of 12 year AMMF has been paying regular dividends to its investors.
Maintaining that tradition, AMMF announced 10% cash dividend i.e., Re. 1 per share for its
shareholders for the year ended June 30, 2008.

2nd Asian Stocks Fund

Asian Stocks Fund Limited is a public limited company incorporated in June 1994 under the
Companies Ordinance, 1984 and has been registered with the Securities and Exchange
Commission of Pakistan (SECP) as an Investment Company under the Investment Companies
and Investment Advisers Rules, 1971 to carry on the business of a closed end investment
company. The company is also registered under rule 38 of the Non-Banking Finance Companies
(Establishment and Regulation) Rules, 2003 (NBFC Rules).

3rd Atlas Fund of Funds

Atlas Fund of Funds (ATFF) is a closed-end fund established by a Trust Deed dated May 29, 2004
between Atlas Asset Management Limited (AAML), as the investment adviser and Central
Depository Company of Pakistan Limited (CDC), as the Trustee.

4th Dominion Stock Fund

These DOMINION STOCK FUND company profiles provided detailed financial data and key credit
information. DOMINION STOCK FUND predominantly operates in the Investment Offices sector.
Investment Company under the Investment Companies and Investment Advisers Rules. 1971 to
carry out the business of a closed end investment company.

5th First Capital Investment ltd Mutual Fund

First Capital Investments Limited (FCIL), a subsidiary of First Capital Securities Corporation, is a
Non-Banking Finance Company licensed to carry out Investment Advisory Services as under the

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NBFC Rules 2003 and is regulated by the Securities and Exchange Commission of Pakistan(SECP).

6th First Dawood Fund

The Fund has been established through a trust deed (Trust Deed or Deed) under the Trusts Act,
1882,
executed between Dawood Capital Management Limited (DCM), 1500-A Saima Trade Towers, I.
I.
Chundrigar Road, Karachi-74000, which has been licensed to undertake investment advisory
services
by the Securities & Exchange Commission of Pakistan (SECP), vide its letter No. NBFC-
17/IA/02/2004 dated May 26, 2004 under Non-Banking Finance Companies (Establishment &
Regulations) Rules, 2003 (the Rules) and Central Depository Company of Pakistan Limited (CDC)
Karachi, duly approved by the SECP to act as the Trustee, vide its letter No. NBFC-II/JD(R)/DCML-
FDMF/976 dated December 2, 2004.

7th Golden Arrow

Golden Arrow Selected Stocks Funds Limited (GASSFL) is a Pakistan-based, closed-end mutual
fund. The Company’s principal activity is to make investment in marketable securities. The
Company’s investment manager is AKD Investment Management Limited.

8th Meezan Balanced Fund

Meezan Balanced Fund (the Fund) is a Pakistan-based closed-end balanced fund. The
investment objective of the Fund is to generate long-term capital appreciation, as well as
current income. It invests in equity securities and Islamic income instruments, such as Sukuk
(Islamic bonds), Musharaka and Murabaha instruments, Shariah compliant spread transactions,
certificate of Islamic investments, Islamic bank deposits and other Islamic income products. Al
Meezan Investment Management Limited (AMIML) serves as the Fund’s management company
and Central Depository Company of Pakistan Limited (CDC) is its trustee.

9th JS Growth Fund

JS Growth Fund (the Fund) is a Pakistan-based, closed-end investment company. The Fund’s
investment objective is to enable the certificate holders to participate in a diversified portfolio
by prudent investment management (investment return being of a combination of capital
appreciation and income). JS Investments Limited is the management company of the Fund.

10th Pakistan Premier Fund

Pakistan Premier Fund Limited (PPFL) is a Pakistan-based closed-end equity fund. The Company

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is engaged in providing investors long term capital appreciation from investments primarily in
Pakistani equities. It primarily invests in shares of listed companies, term finance certificates and
short-term reverse repurchase transactions. Arif Habib Investments Limited is the Company’s
investment advisor.

July 5th, 2007 -National Investment Trust (NIT), one of the oldest and most reliable open-ended
mutual funds has declared record dividend of PKR 6.20/  per unit. NIT's single fund is well-known in the
country for its capital plus dividend gains. At present NIT is operating at PKR 61/-(BUYING) and 60/-
selling per unit

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What Is Diversification?

Protecting the long-term value of your investments means using a variety of investments.
As an investor, you're interested in investing your money wisely. But what is the best way to invest?
It's difficult to know which funds will outperform other funds at any given time. Market timers (people
who move money around seeking the best performance) often discover they have bought into a fund at
the height of its popularity. And, at that point, the price may go down.
But the thing to remember is that funds do go in and out of style. Large cap, small cap and international
stock funds have all taken turns at the front (and back) of the pack on Wall Street. Not so many years
ago, bond funds were beating the returns of stock funds across the board.
So, what do you do with that information? You adopt a sensible, time-honored investment strategy that's
easy to understand and easy to put into practice.
It's called diversification

Diversification and you:

So, it turns out diversification is pretty simple. You just need to hold a little bit of everything -- using
funds that hold stocks, bonds and money markets -- right? Not quite -- instead, you need to hold
investments that match your particular goals. And your goals can vary depending on your age, your
accumulated wealth and your inclination to take greater risks for potentially greater returns.
Time for a little self-assessment: Are you just starting out in your career? Somewhere in the middle of it?
Or close to retirement? Are you a saver, always in favor of reducing risks? A trader, ready to jump to the
next great idea as soon as the old plan falters? Or an investor, someone who views investing as a long-
term activity? Your location along life's journey and your comfort level for risk can make a difference in
the design of your specific diversification plan.

Diversification and mutual funds:

Not too many years ago, mutual funds were simply broad-based investment instruments created to
simplify the intricacies involved in investing in separate securities. They also provided a greater measure
of safety through broad diversification and the kind of top notch professional management that is
usually out of reach for the small investor.
Today, however, mutual funds are highly specialized and offer almost unlimited diversity. The types of
mutual fund portfolios available run the gamut from conservative to aggressive, from stocks to bonds,
from domestic to international portfolios, from taxable to tax-free, and from virtually no-risk money
market funds to high-risk options funds. The great variety of mutual funds available makes it possible to
select a fund, or several funds, which precisely various types of funds and their primary objectives are
described below. (They are arranged in order of increasing risk factors)

Money Market Fund

We begin with a discussion of money market funds for several reasons:

1. They are the safest for the novice investor;

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2. They are the easiest, least complicated to follow and understand;
3. Almost without exception, every mutual fund investment company offers money market
funds;
4. Money market funds represent an indispensable investment tool for the beginning investor.
5. They are the most basic and conservative of all the mutual funds available;
Money market funds should be considered by investors seeking stability of principal, total
liquidity, and earnings that are as high, or higher, than those available through bank certificates
of deposit. And unlike bank cash deposits, money market funds have no early withdrawal
penalties.
Specifically, a money market fund is a mutual fund that invests its assets only in the most liquid
of money instruments. The portfolio seeks stability by investing in very short-term, interest-
bearing instruments issued by the state and local governments, banks, and large corporations.
The money invested is a loan to these agencies, and the length of the loan might range from
overnight to one week or, in some cases, as long as 90 days. These debt certificates are called
"money market instruments"; because they can be converted into cash so readily, they are
considered the equivalent of cash.
To understand why money market mutual funds is recommended as an ideal investment, let
me reemphasize just seven of the advantages they offer:
1. Safety of principal, through diversification and stability of the short-term portfolio
investments
2. Total and immediate liquidity, by telephone or letter
3. Better yields than offered by banks, 1% to 3% higher
4. Low minimum investment, some as low as $100
5. Professional management, proven expertise
6. Generally, no purchase or redemption fees, no-load funds

Income Funds

The objective of income mutual funds is to seek a high level of current income commensurate
with each portfolio's risk potential. In other words, the greater the risk, the greater the
potential for generous income yields; but the greater the risk of principal loss as well.
The risk / reward potential is low to high, depending upon the type of securities that make up
the fund's portfolio. The risk is very low when the fund is invested in government obligations,
blue chip corporations, and short-term agency securities. The risk is high when a fund seeks
higher yields by investing in long-term corporate bonds, offered by new, undercapitalized, risky
companies.

Who should invest in income funds?

§ Investors seeking current income higher than money market rates, who are willing to
accept moderate price fluctuations
§ Investors willing to "balance" their equity (stock) portfolios with a fixed income investment
§ Investors who want a portfolio of taxable bonds with differing maturity dates

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§ Investors interested in receiving periodic income on a regular basis.

Income and Growth Funds

The primary purposes of income and growth funds are to provide a steady source of income
and moderate growth. Such funds are ideal for retirees needing a supplement source of income
without forsaking growth entirely.

Growth and Income Funds

The primary objectives of growth and income funds are to seek long-term growth of principal
and reasonable current income. By investing in a portfolio of stocks believed to offer growth
potential plus market or above - market dividend income, the fund expects to investors seeking
growth of capital and moderate income over the long term (at least five years) would consider
growth and income funds. Such funds require that the investor be willing to accepts some
share-price volatility, but less than found in pure growth funds.

Balanced Funds

The basic objectives of balanced funds are to generate income as well as long-term growth of
principal. These funds generally have portfolios consisting of bonds, preferred stocks, and
common stocks. They have fairly limited price rise potential, but do have a high degree of
safety, and moderate to high income potential.
Investors who desire a fund with a combination of securities in a single portfolio, and
who seek some current income and moderate growth with low-level risk, would do well to
invest in balanced mutual funds. Balanced funds, by and large, do not differ greatly from the
growth and income funds described above.

Growth Funds

Growth funds are offered by every investment company. The primary objective of such funds is
to seek long-term appreciation (growth of capital). The secondary objective is to make one's
capital investment grow faster than the rate of inflation. Dividend income is considered an
incidental objective of growth funds.
Growth funds are best suited for investors interested primarily in seeing their principal
grow and are therefore to be considered as long-term investments - held for at least three to
five years. Jumping in and out of growth funds tends to defeat their purpose. However, if the
fund has not shown substantial growth over a three - to five-year period, sell it (redeem your

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shares) and seek a growth fund with another investment company.
Candidates likely to participate in growth funds are those willing to accept moderate to
high risk in order to attain growth of their capital and those investors who characterize their
investment temperament as "fairly aggressive."

Index Funds

The intent of an index fund is basically to track the performance of the stock market. If the
overall market advances, a good index fund follows the rise. When the market declines, so will
the index fund. Index funds' portfolios consist of securities listed on the popular stock market
indices.
It is also the intent of an index fund to materially reduce expenses by eliminating the
fund portfolio manager. Instead, the fund merely purchases a group of stocks that make up the
particular index it deems the best to follow. The stocks in an index fund portfolio rarely change
and are weighted the same way as its particular market index. Thus, there is no need for a
portfolio manager. The securities in an index mutual fund are identical to those listed by the
index it tracks, thus, there is little or no need for any great turnover of the portfolio of
securities. The funds are "passively managed" in a fairly static portfolio. An index fund is always
fully invested in the securities of the index it tracks.
An index mutual fund may never outperform the market but it should not lag far behind
it either. The reduction of administrative cost in the management of an index fund also adds to
its profitability.

Sector Funds

As was noted earlier, most mutual funds have fairly broad-based, diversified portfolios. In the
case of sector funds, however, the portfolios consist of investment from only one sector of the
economy. Sector funds concentrate in one specific market segment; for example, energy,
transportation, precious metals, health sciences, utilities, leisure industries, etc. In other words,
they are very narrowly based.
Investors in sector funds must be prepared to accept the rather high level of risk
inherent in funds that are not particularly diversified. Any measure of diversification that may
exist in sector funds is attained through a variety of securities, albeit in the same market sector.
Substantial profits are attainable by investors astute enough to identify which market sector is
ripe for growth - not always an easy task!

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 Specialized Funds

Specialized funds resemble sector funds in most respects. The major difference is the type
of securities that make up the fund's portfolio. For example, the portfolio may consist of
common stocks only, foreign securities only, bonds only, new stock issues only, over - the -
counter securities only, and so on.
Those who are still novices in the investment arena should avoid both specialized
and sector funds or the time being and concentrate on the more traditional, diversified
mutual funds instead.

Islamic Funds

In case of Islamic Funds, the investment made in different instruments is to be in line with
the Islamic Shairah Rules. The Fund is generally to be governed by an Islamic Shariah
Board. And then there is a purification process that needs to be followed, as some of the
money lying in reserve may gain interest, which is not desirable in case of Islamic
investments.

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