Mohsin Siddiqui (Chief Reporter)
The Securities and Exchange Commission of Pakistan (SECP) has voiced serious concerns over the inability of stock market-linked mutual funds to attract new investors. Despite charging the highest selling and marketing expenses as part of their Total Expense Ratio (TER), these funds have seen a significant drop in equity fund shares. According to SECP data, the share of stock market-linked equity funds plummeted from 40% in 2019 to just 10% in 2023. This decline has placed an undue burden on existing investors, who feel they are being taxed to attract new ones.
To address these issues, the SECP has published a consultation paper proposing various alterations to the total expense regime (TER) and distribution paradigm for mutual funds and pension funds. These suggestions aim to reduce the burden on retail investors, optimize their returns, inculcate better saving habits, and increase retail penetration.
The data compiled by the SECP reveals a troubling trend. The share of stock market-linked equity funds has dropped significantly, highlighting a pressing need for intervention. Despite the high expenses charged by these funds, they have failed to bring in new investors, exacerbating the pressure on the existing ones. This situation is perceived as unfair, as current investors are effectively subsidizing the marketing efforts aimed at attracting new participants.
In response to these challenges, the SECP’s consultation paper reviews the current TER framework for mutual funds, pension funds, and distribution models. The proposed changes are designed to reduce the financial burden on investors, enhance their long-term returns, and ensure equity and transparency in fund management expenses.
The SECP suggests altering the current TER frameworks for both mutual and pension funds. These changes aim to make the financial burden more manageable for investors and to ensure transparency and fairness in how expenses are allocated.
The paper also addresses issues that have hindered the growth of the distribution network and affected retail penetration. It recommends a transformative framework to revamp the distribution model, making it more accessible and user-friendly for average investors. These changes are aligned with international best practices to maximize the value participants receive from their savings.
Despite the overall growth of the asset management company (AMC) industry from Rs 500 billion to Rs 2.0 trillion between 2019 and December 2023, retail investors’ holdings decreased from 40% to 38%. The SECP aims to reverse this trend by implementing reforms that encourage retail investment and foster better saving habits.
The AMC industry has experienced significant growth, largely driven by the money market and fixed income segments influenced by high interest rates. However, this growth has not translated into increased retail participation. The SECP’s proposals aim to create a more balanced growth trajectory that includes a broader base of retail investors.
The SECP is seeking public feedback on these proposed changes to introduce regulatory reforms that create a more efficient, transparent, and equitable system. The goal is to develop a regulatory environment that better meets the needs of investors and supports the long-term growth of the mutual fund and pension fund industries.
