The mutual funds-to-total banking deposit ratio is a key indicator that measures the percentage of mutual fund assets in comparison to the total banking deposits in a country.

It is used to assess the level of investment in mutual funds as opposed to the traditional banking products. A regional comparison of Pakistan, India, Sri Lanka and Bangladesh reveals interesting findings.

As of January 2023, Pakistan had mutual funds-to-total banking deposit ratio of approximately 6.8%, which indicates a relatively small mutual fund industry compared to the traditional banking sector.

In contrast, India has a much larger mutual fund industry. As of January 2023, India’s mutual funds-to-total banking deposit ratio was approximately 22.80%. The country has a wide range of investment options available, tax benefits and a higher disposable income, which have contributed to the industry’s significant growth in recent years.

Sri Lanka’s mutual funds-to-total banking deposit ratio is approximately 1.52%. Bangladesh has the smallest mutual fund industry compared to other countries in the region.

As of December 2022, its mutual funds-to-total banking deposit ratio was approximately 0.72%. Despite its small size, the industry has been growing due to increased investor awareness and the introduction of new financial products.

India has the largest mutual fund industry in the region, followed by Pakistan, Sri Lanka and Bangladesh. However, all these countries have seen significant growth in their mutual fund industries in recent years, driven by increasing investor demand, improvement in financial literacy and the introduction of new financial products.

Let’s explore the incredible success story of India’s mutual funds and its comparison with Pakistan with the help of some basic ratios.

The mutual fund industry in India has seen a remarkable growth in recent years, with a significant portion of the industry being driven by retail investors.

As of December 2022, around 91% of mutual fund accounts in India were held by retail investors, a remarkable feat. In comparison, the mutual fund industry in Pakistan is relatively smaller, with retail investors accounting for only 33% of the total assets under management (AUMs) as of FY22.

India’s success in the mutual fund industry can be attributed to the increase in investor awareness, with investors becoming more educated about the benefits of mutual fund investment compared to holding cash in hand and the basic current account.

This has led to a surge in demand for mutual funds in the country, with the total number of mutual fund accounts standing at an impressive 142.8 million as of January 2023. A majority of these accounts, around 114.3 million, are held by retail investors.

In contrast, Pakistan has been slower in developing its mutual fund industry. It is worth noting that the country’s mutual fund industry has been around for over six decades, with the first open-end fund being established in 1962 and the first private sector open-end fund being launched in 1983.

However, despite this history, the industry has been slow to grow. As of now, there are only 500,957 mutual fund accounts, with the majority being held by retail investors.

The ratio of mutual fund accounts-to-total population in Pakistan is merely 0.22% while in India the ratio is an enchanting 10%.

The mutual fund industry in Pakistan can learn from the experience of India to bring improvements in its operations and increase investor confidence.

The difference in success of the mutual fund industry in India and Pakistan can be attributed to various factors such as increasing investor awareness, higher disposable income, attractive market valuations, government initiatives and robust regulatory frameworks that create a positive environment for retail investment. Here are some more steps that Pakistan can take:

Investor education: Mutual fund investors need educational programmes to understand investment risks and benefits. MUFAP, along with asset management companies, can create an educational programme, modeled on the AMFI programme in India, to promote financial literacy and attract more investors.

Mutual fund awareness campaign: Pakistan needs an awareness campaign similar to the one run by the Securities and Exchange Board of India (SEBI). They launched a campaign in 2017 called “Mutual Fund Sahi Hai” to create awareness among investors about the benefits of mutual funds. Since the launch, the industry has witnessed 102% growth in AUMs.

Regulatory support: The Indian government has been promoting mutual funds through various initiatives and measures. Most importantly, the government provides tax benefits to investors who invest in mutual funds.

For instance, equity mutual funds held for more than one year are exempt from long-term capital gains tax, while the same tax is exempted after six years in Pakistan.

Promote technology: Pakistan should encourage the use of technology to make mutual fund investing more accessible to investors. Technology can play a crucial role in promoting mutual funds by making investment more accessible, convenient and informative.

This can include reducing documentation, offering online investment platforms and smart mobile apps that allow investors to manage their investments easily.

In conclusion, Pakistan can improve its mutual fund industry by learning from the experience of India and developed countries.

The article is meant for general information purposes only and should not be taken as an investment recommendation. It is important to remember that mutual fund investments are subject to market risks. It is recommended that you carefully read all scheme-related documents to ensure the investment aligns with your risk-return profile.

The writer is SVP – Head of Shariah Compliant Income Portfolios at Al-Meezan

Published in The Express Tribune, March 13th, 2023.

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