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This article was co-written by Erin A. Hadley, CFP®. Erin A. Hadley is a Managing Partner at Occidental Asset Management, LLC in California. Erin is a certified financial planner with over 10 years of experience in investment management and financial planning. She holds a Certificate in Personal Financial Planning from the University of California, Berkeley and is a member of the National Association of Personal Financial Advisers (NAPFA).
Profitable Investment Schemes
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Creating a viable investment plan requires more than just opening a savings account and buying a few random stocks. To properly structure a plan, it’s important to understand where you are and what you want to achieve with your investments. You will determine how to achieve these goals and choose the best investment options to achieve them. The good news is that it’s never too late to create and execute a personal investment plan and start building a nest egg for the future.
This article was co-written by Erin A. Hadley, CFP®. Erin A. Hadley is a Managing Partner at Occidental Asset Management, LLC in California. Erin is a certified financial planner with over 10 years of experience in investment management and financial planning. She holds a Certificate in Personal Financial Planning from the University of California, Berkeley and is a member of the National Association of Personal Financial Advisers (NAPFA). This article has been viewed 253,472 times.
Create a solid investment plan that will help your assets mature at a rate that meets your individual needs. If you’re young and willing to take more risk, invest in more aggressive assets like growth and small-cap stocks. For a safer bet, allocate more of your portfolio into less aggressive investments, such as large-cap companies and fixed income. If you just want money for retirement, consider investing in an IRA or 401(k). Diversifying your portfolio is always a good idea to minimize risk. For example, divide your investments into stocks, bonds, and savings accounts. It’s also a good idea to keep an emergency savings account with 3 to 6 months of living expenses in case of a major financial hardship, such as losing your job. For more tips from our finance coauthor, including how to adjust your portfolio over time, read on! If you have never invested before, have money in your pocket that you can keep for at least three years, we would like to introduce you to a simple way to invest called “Mutual Funds”.
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The name mutual fund may seem intimidating to most people unfamiliar with investment products. Mutual funds have the following advantages:
A mutual fund is a collective investment program that pools money from many investors. An Asset Management Company (AMC) duly licensed by the Securities and Exchange Commission of Pakistan (SECP) invests money on your behalf in securities or other financial assets for profit/income and income.
In Pakistan, most mutual funds are open ended. Each open unit represents the investor’s respective shareholding in the fund’s indivisible portfolio; each shareholder shares equally with other investors in the distribution. Investors purchase mutual fund units from the fund itself or from licensed banking/financial companies acting as distributors/sales agents. Open-end units are not traded on the secondary market like the PSX.
As a rule, an independent trustee registered with the SECP has custody of all mutual fund assets. The trustee is obligated to ensure that AMC invests in the fund’s assets in accordance with the mutual fund’s approved investment policy and authorized investments, and that all mutual fund assets, including cash, are registered in the name or at the request of the fiduciary.
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Fund managers at asset management firms are supported by dedicated research teams responsible for overseeing fund portfolio performance.
You don’t have to worry about managing your daily portfolio. The diversification offered by mutual funds simply cannot be achieved by a small investor with limited investment funds.
Mutual funds can provide you with regular income and the opportunity to grow your savings through reinvestment. Here are the benefits of investing in mutual funds:
An Asset Management Company (AMC) evaluates investment opportunities by researching, selecting and monitoring the performance of securities purchased by the fund. AMC employs qualified investment professionals who make calculated investment decisions on your behalf. This is not an easy task for an individual without specialist knowledge.
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By spreading your investment across multiple securities and investment sectors, mutual funds can help you reduce your risk if a company or industry fails. Diversification can be best summed up as “Don’t put all your eggs in one basket”.
Mutual funds help investors who don’t have a lot of money to invest by setting a relatively low amount of rupees for initial purchases and subsequent monthly purchases. For example, you can add money with a set amount such as PKR 1000-5000 per month or other time periods. Mutual funds buy and sell large amounts of securities at the same time. Your transaction costs and management fees are shared with those who jointly own the unit.
Mutual fund unit holders can easily convert their units into cash on any business day. They will quickly receive the present value of their investment within six business days. Investors do not need to find a buyer, the fund buys back (buys back) units at their current net asset value (NAV).
The SECP conducts ongoing monitoring of mutual funds through reports that licensed mutual funds submit to the SECP on a regular basis. In addition, SECP conducts on-site inspections of AMCs.
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Mutual fund performance is carefully reviewed by various publications and rating agencies, making it easy for investors to compare fund performance. As a unit holder, you receive regular updates such as daily NAV as well as information on fund holdings and fund manager strategy.
Investing in mutual fund programs allows investors to take advantage of tax credits that increase the overall return on their savings.
In Pakistan, the SECP, in consultation with the Mutual Funds Association of Pakistan (MUFAP), created criteria for classifying open-end mutual funds along with investment limits. In general, the greater the potential profit, the greater the risk of loss. The SECP has approved the following categories of mutual funds:
An equity fund that invests in equities is often referred to as a stock/stock subject to the volatility risk associated with the stock market. Although this fund is the riskiest, it can deliver maximum long-term growth through capital appreciation. An equity fund, by classification, must invest at least 70% of its net worth in listed equities. The remaining liquid assets of an equity plan can be invested in cash or in close cash instruments.
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These funds focus on providing investors with a steady source of fixed income. They invest in short-term and long-term debt instruments such as Term Financial Certificates (TFCs) issued by companies and government securities such as Treasury bills and Pakistan Investment Bonds (GDPs). An income fund is considered less risky than an equity fund. Therefore, the opportunity for capital appreciation is limited. Income funds are required to hold at least 25% of their liquid assets in cash and/or quasi-cash instruments to meet liquidity requirements.
These funds invest in short-term fixed-income securities such as Treasury bills, government bonds, certificates of deposit and commercial paper. The objective of a money market fund is to maintain high liquidity by investing in short-term instruments that are low risk and generally a safer investment. The returns generated by money market funds are likely to fluctuate much less than other types of mutual funds. Money market funds are ideal for new investors because they are the least complicated to track and understand.
A balanced fund provides growth in investments as well as regular income by investing in equities and fixed income bonds. The regulatory framework stipulates that mixed investment funds invest from 30% to 70% of their net worth in listed equity securities. The remaining balance can be invested in other permitted investments.
Funds of funds that invest in other mutual funds. Each fund of funds should be classified according to its investment objective, e.g. fund of funds, fund of income funds, etc. These funds operate a diversified portfolio of equity, fixed income, balanced and money market funds.
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Islamic funds invest in Shariah compliant securities i.e. stocks, Sukuk (Islamic bonds) and GOP Ijara Sukuk etc. may be approved by the Sharia Counselors of such funds. These funds can be offered in the same category as regular funds.
This type of fund may invest its liquid assets in various securities and investment styles as specified in the offering document. Asset allocation funds are often considered high risk funds because of their ability to
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