The Securities and Exchange Commission of Pakistan (SECP) has laid down the criteria for mutual funds’ investment in listed equity securities. The criteria has been finalized to safeguard the interests of unit holders of collective investment schemes while ensuring better risk management by the asset management companies (AMCs).
The mutual fund industry of Pakistan has shown tremendous growth in the recent past. The assets under management of AMCs have increased from Rs546 billion as of June 30, 2016 to Rs694 billion as of March 31, 2017, showing an increase of Rs148 billion or 27% during the first nine months of FY 2016-17. The significant increase in assets under management further necessitates the need for adequate risk management to protect investors.
In this context, an initiative was taken by the SECP wherein efforts have been made to strengthen the risk management framework already in place at AMCs. For this purpose, a detailed in-house study was conducted by the SECP to identify the eligible securities for mutual funds’ investment.
As a result of the said study and after consultation with the stakeholders, a criteria has been finalized for identification of eligible equity securities for mutual fund’s investment. According to the criteria, substantial part of the mutual funds’ investment shall be made in those equity securities that meet the requirements pertaining to free float and minimum number of traded days. AMCs are also required to consider financial strength of the investee company, i.e. net worth, trading status on PSX, and regulatory compliance. Moreover, weightage shall also be given to the observations in respective auditor’s reports.
It is expected that the criteria will minimize the chances of excessive risk being taken by the AMCs and provide a prudent base for investment decisions of the fund managers managing the collective investment schemes.