Top 5 conventional Mutual Funds worth exploring

Ready to explore new income sources? Ready to get rich and retire early? Enter Mutual funds, a low risk way of investing your savings with the potential to make a good living. Believe it or not, Mutual Funds are used by people of different ages throughout the world, with the aim of fulfilling different goals and objectives.

So folks, let’s get to know our buddy (or should I say buddies) a bit better and understand which ones are worth hanging around with. Before we begin, allow me to share another one of my researches. One thing that I have learnt in life is that there are two types of friends: ones who are too smart and interesting and are completely capable of leaving you in no mans’ land, but extremely useful as well. Second are the boring geeks who would do anything to be with you basically because they have no other friend apart from you! Just kidding, they are the good ones.

Similarly, Mutual Funds usually come in two forms: low and high risk. High risk funds usually invest their money in risky assets, such as stocks that are poorly rated by the agencies. So, just as a smart friend, they have the potential to provide you with above average returns and the same time they might leave you, in simple terms, bankrupt! The less risky ones provide you with a stable stream on income and their investments are usually made in risk-less assets. So just as boring friends don’t stab you in the back, these funds usually act as loyal associates and provide you with steady income.

So which ones should you invest in? Well, that depends on your taste. If you are an aggressive “You only live once” type of a person, then high risk Mutual Funds will suit you better. As your financial advisors, we would recommend that as first timers, you play a bit passive till you are completely comfortable with this investment alternative.

So, let’s begin our journey of exploring Mutual Funds of various different firms in Pakistan. We will discuss both High and Low-risk funds to provide you with more of a choice.

United Bank Limited (UBL)

Despite a difficult year for the capital markets, this fund has done reasonably well when compared to high-risk investment funds (see below). So for instance, if you would have invested Rs. 10,000 on 6th April 2017, your costs and revenues would have been:

  • Entry load = 100
  • Total units bought = 93 (9,900/105.8)
  • Management fee = Max of Rs. 97
  • Total revenue = 9,672
  • Total costs = 197
  • Actual 1-year return = -3.25%

Due to insufficient data, these calculations do not take into account revenues such as dividends and interest. Once these are taken into account, your actual return should be much better and possibly even positive. So, if you are worried about the negative sign in front of the figure, do not worry about it for now. Your return for a longer time frame should be way better than this. Remember, Mutual Funds are a 3-5 year investment vehicles.

For the purpose of simplicity, we have ignored taxes on capital gains and dividends. Also, to have a recap of the terminology used in the table above, visit our Mutual Fund 101 blog.

This is a high-risk fund that has the potential to move up and down significantly. In good times, these funds rise to an extremely high level, and come crashing towards the ground in tough times. Have a look at the revenues and costs for the 1-year time frame we have considered for an investment of Rs. 10,000:

  • Entry load = 250
  • Total units bought = 117 (9750/83)
  • Management fee = Rs. 177
  • Approximate dividend = 380
  • Total revenue = 8834
  • Total costs = 427
  • Actual 1-year return = – 7.13%

Notice that we have an approximation for the amount of dividend paid to the investors. When we take this figure into account our return improves significantly. Without them, out actual 1-year return is around -11%.

Habib Bank Limited (HBL)

Similar to UBL’s money market fund, we find that HBL’s money market fund provides reasonable return in what was a difficult year. To get an idea of the actual returns to the investors, have a look at the following figures:

  • Entry load = 0
  • Total units bought = 93 (10,000/105.8)
  • Management fee = Max of Rs. 98
  • Total revenue = 9,840
  • Total costs = 98
  • Actual 1-year return = -2.6%

Since HBL’s money market fund has no entry-load, coupled with a low management fee and relatively better performance, when compared with UBL, the return to the investor is way better than what they got by investing in UBL’s money market mutual fund.

HBL’s Multi Asset fund is similar to UBL’s high-risk fund. It mainly invests in high-risk firms that have the potential to provide positive cash flow in the future. Let’s have a look at how this fund performed:

  • Entry load = 200
  • Total units bought = 83 (9,800/117)
  • Management fee = Rs. 183
  • Total revenue = 9,130
  • Total costs = 383
  • Actual 1-year return = -8.5%

The actual return to an investor after taking into account all the costs was quite close to what a high-risk investor got by investing in UBL’s stock advantage fund. One point worth mentioning is that this fund invests in a variety of asset classes, which considerably reduces the risk to an investor. If the stock market isn’t performing, fear not the bond market might become your savior!

AlFalah GHP

Al-Falah’s 1-year return is lower than HBL and UBL’s return. In fact, it is way lower than all the money market funds considered in this analysis. Don’t get your alarm bells ringing! This fund might perform in better circumstances and might produce higher returns than all of its rivals. Anyhow, have a look at the actual returns of the fund:

  • Entry load = 100
  • Total units bought = 95 (9,900/103.9)
  • Management fee = Rs. 77
  • Total revenue = 9,624
  • Total cost = 177
  • Actual 1-year return = -3.53%

Due to its lower costs when compared with UBL, the returns of both firms are quite identical from an investor’s standpoint, but lower than HBL’s money market fund. These costs can be extremely beneficial for the investor in better times.

Al-Falah’s Value fund was hit the hardest of them all. With an annual return of -18.8%, the returns to the investors would have been the worst of all the high-risk funds considered. The returns to an investor are as follows:

  • Entry load = 300
  • Total units bought = 118 (9,700/81.8)
  • Management fee = Max of Rs. 157
  • Total revenue = 7,835
  • Total costs = 457
  • Actual 1-year return = -20%

Surely, Al-Falah’s investors looking for short gains should be concerned about the performance of this stock over the period considered. However, investors looking to keep their investments for 3-5years would not be too concerned since these funds have the potential to go up in a matter of weeks and months. Also, this is a highly liquid fund so pulling the plug when the units rise in value, should not be a problem.

MCBAH (MCB-Arif Habib)

MCB’s cash management fund is similar to the money market fund we have considered. It basically invests in the same asset classes as the funds of other banks. Moreover, it has done reasonably well when compared to other funds. To give you an idea of the returns earned by an investor, have a look at the following:

  • Entry load = none
  • Total units bought = 94 (10,000/105.8)
  • Management fee = Max of Rs. 98
  • Total revenue = 9,834
  • Total costs = 98
  • Actual 1-year return = – 2.6%

This return is quite good from the standpoint of the investor. It is higher what investors earned by investing in UBL and Al-Falah, and identical to HBL’s. In short, the management of MCB has done a reasonable job in terms of limiting the losses of the investors.

  • Entry load = 300
  • Total units bought = 118 (9,700/82.25)
  • Management fee = Max of Rs. 88
  • Total revenue = 8,785
  • Total costs = 388
  • Actual 1-year return = – 10.3%

MCB’s investors would have received quite a low level of return for the high-risk fund. -10.3% is quite low considering the fact that some of its competitors have performed much better. On the other hand, this fund has certainly seen better days in prior years.

AKD securities limited

AKD’s cash fund has performed reasonably well, with the management limiting potential losses for the investors by investing in safe government bonds. The return to the investors are as follows:

  • Entry load = 0
  • Total units bought = 190 (10,000/52.6)
  • Management fee = Max of Rs. 40
  • Total revenue = 9,886
  • Total costs = 40
  • Actual 1-year return = – 1.5%

AKD’s cash fund provided the best returns to the investors. With NAV that has remained fairly steady and with low management fee, AKD has outperformed its rivals over the time horizon we have analyzed. Investors looking for short-term investments should definitely keep an eye on this firm.

AKD’s high-risk fund has not suffered as much as other firms’ funds have. Negative return of 3.2% along with low management charges should provide the investors with good returns, when compared to other funds.

  • Entry load = 100
  • Total units bought = 180 (9,900/54.8)
  • Management fee = Rs. 143
  • Total revenue = 9,540
  • Total costs = 243
  • Actual 1-year return = – 5%

Again, AKD’s aggressive income fund outperformed all the other high-risk funds that we have considered. Negative return of 5% is way better than its closed peer, UBL’s Stock Advantage fund. A high-risk investor looking for abnormal gains in good times, should definitely keep AKD in mind.