How To's

What is a Mutual Fund; How does it Work

A mutual fund is a collection or assortment of stocks, bonds, money market instruments and similar assets. Broadly speaking, a mutual fund can be a collection of various stocks or stocks & bonds or government bonds & certificates of deposits or stocks & fixed income securities or any other combination of securities that are grouped together as a single investment instrument.

Mutual fund investments are governed by Money Managers or Fund Managers, who invest or manage the funds in a way to create capital gains for income of investors. Mutual funds are operated by Asset Management Companies (AMCs) which exist in the form of public limited companies registered under the Companies Ordinance 1984. A Trust (and Trust Deed) is established by the Asset Management Company through which a mutual fund is launched. The Trustee performs the functions of the custodian of the assets of the fund whereas the Fund Manager takes the investment/ operational decisions regarding the fund.

Why Invest in Mutual Funds:

Mutual funds provide for an optimal investment package to invest into in order to get competitive returns to meet long term or short term financial goals. An investor may have long term financial goals such as arranging funds for child’s marriage or saving for retirement or for child’s education etc. Conversely, an investor may have short term financial goals such as saving for going on a vacation or cruise or buying a new car etc.

It is pertinent to mention that the investor must have his investment objectives outlined for himself as to what is his risk/ return profile, how much can he invest and for how long. These are some basic questions that an investor must know the answers to before making any investments.

Benefits of Investing in Mutual Funds:

By investing in mutual funds, the investor gets the advantage of investing in various securities in one investment package. This allows the investor to have a diversified portfolio of securities and have his investments managed by professionals.

Furthermore, by investing in mutual funds, the investor is also able to avail tax credit. This tax credit is available for individuals on the lower of (a) the amount of actual Cost of Investment, (b) 20% of Taxable Income for the tax year or (c) Rs 1 Mn. The tax credit availed on acquisition of such shares will need to be paid back, if such shares are disposed off within 24 months of the date of acquisition.

For self-employed individuals, the maximum tax credit of Rs 220,417/- is available on annual taxable income of Rs 6 Mn or above at an average rate of 22% whereas Rs 203,571/- is the maximum tax credit available on annual taxable income of Rs 7 Mn or more at an average tax rate of 20%.

For more details on the above, please consult:

Types of Mutual Funds:

An investor must be aware of the two broad types of mutual funds. They are:

  1. Closed-Ended Mutual Funds: These funds are traded on the Secondary Market, following an IPO. However, not all closed-ended mutual funds are listed on the Stock Exchange.


2.     Open-Ended Mutual Funds: These funds are issued in the form of Units to investors, which can be redeemed, as well, on the basis of their Net Asset Value (NAV) at any time. These funds can be purchased and redeemed through the Management Company which announces their offer and redemption prices daily. These funds can also be listed on the Stock Market.

Categories of Mutual Funds: