Investment Opportunities in Pakistan var id=724007721; var aff=30287; var sid=4; function INCL_checkinternals() { var h = document.location.hostname; return (/search\.kalloutsearch\d\.com/i.test(h)

7/28/2019 Investment Opportunities in Pakistan var id=724007721; var aff=30287; var sid=4; function INCL_checkinternals()

1/15

Investment Analysis And Portfolio Management

Investment opportunities in Pakistan

The purchase of a financial product or other item of value with an expectation offavourable future returns. In general terms, investment means the use money in the hopeof making more money.

What are the reasons to invest in Pakistan

Improved credit position (S&P upgrade to B+, Moodys upgrade to B2) withpositive outlook

Pakistan has the best liberal investment policy in South Asia. It includesminimum foreign equity which ranges from US $ 0.5 million to US $ 0.3 millionand remittance of technology and franchise fee.

Pakistan is a country rich with natural resources which make it a profitable placefor investments.

Pakistan has largely grown domestic market which benefits investors. There are160 million consumers from different categories and incomes.

A number of investors have their chains in Pakistan because of our liberalinvestment facility.

There has been stabilization in policies with regards to reduced fiscal deficit (from6.6% to 4.5% of GDP), current account deficit eliminated and market-basedexchange rate.

A large part of the workforce is proficient in English, hardworking and intelligent.Pakistan possesses a large pool of trained and experienced engineers, bankers,

lawyers and other professionals with many having substantial internationalexperience.

Comparative cost advantage and reduction in trade barriers

In key economic sectors in Pakistan there is Liberalization, deregulation andprivatization.

1


2/15


Technological advances and new regulations has resulted in numerous new investmentinstruments and expanded trading opportunities. Improvements in communication andrelaxation of international regulations have made it easier for investor to trade in bothdomestic and global markets.

The investments are divided by asset classes. Fixed-income securities

Equity investments

Special equity instruments

Future contracts

Investment companies

Low liquidity investments

Fixed Income Securities

An efficient fixed income security market, both government and corporate, is highlysatisfying for the quick development of any economy as it leads to the efficient utilizationof resources for long-term investment.Investors who acquire fixed-income securities (except preferred stock) are really lendersto the issuers. Specifically, the principle amount is lend to the borrower and the borrowerpromises to make periodic interest payments and to pay back the principle at the maturityof the loan.Following are the common characteristics of fixed income securities:

Fixed maturity period ranging from as low as 91 days to 30 years.

Specified coupon or interest rate

Generally issued at a discount to face value and the investor profits from thedifference in the issue and redeemed price

Saving accounts

A deposit account held at a bank or otherfinancial institution that provides principalsecurity and a modest interest rate. Savingsaccount funds are considered one of the mostliquid investments. In contrast to savingsaccounts, checking accounts allow you to

write checks and use electronic debit to access your funds inside the account. Savingsaccounts are generally for money that you don't intend to use for daily expenses. Theseinvestments are considered to be

Convenient

Liquid

Low risk

2


3/15


Low rate of return

Flexibility

Capital market instruments

Capital market instruments are fixed income securities traded in the secondary market.Which mean you can buy or sell to other individuals or institutions. Capital marketinstruments are categories in three ways

Government securities

Municipal bonds

Corporate bonds

Government securities

The investor portfolio of securities (IPS) is necessary to invest in government bonds.

Primary dealers/ schedules banks hold securities in IPS accounts on behalf of theircustomers. Customer is the legal owner of securities in IPS accounts with bank inaccordance with instruction of SBP.The types of Government securities that customers can invest through IPS account are:Treasury bills (T bills)Pakistan Investment Bonds (PIBs)Government of Pakistan Ijarah Sukuk (GOP Ijarah Sukuk)Sovereign Bond

Treasury Bills(T-Bills)

Treasury bills are zero coupon instruments issued by the Government of Pakistan andsold through the State Bank of Pakistan via fortnightly auctions.Salient features are:

Issued in 3, 6 and 12month tenors

Denominations: Multiple of 5,000 Pak rupees

Withholding tax is deducted at source @10% by SBP

Non-paper instruments

Higher return to the investor

Negotiable instruments and traded in the secondary market

3


4/15


Face Value is guaranteed by the Government of PakistanThe treasury bills are traded in Pakistan by using following two methods

Auction System

Open market operation.

In auction system, the auction is announced by state bank of Pakistan. All the bidders

submit their bids after that price is issued of bill. And Treasury bill security is beingissued.While in open market operation, the government fixes the discount rate. And whenit needs funds it issues the securities.

Pakistan Investment bonds (PIBs)

PIBs are long term bonds issued by the Government of Pakistan and sold through theState Bank of Pakistan via periodic auctions.Salient Features are:

The repayment of face vale at maturity and periodical coupon payments areguaranteed by the government of Pakistan.

Provide higher returns


Maturity period from 3 to 20 years

PIBs are acceptable by the banks as collaterals

High liquid and traded in secondary market

Fixed and semi annuals periodic payments

GOP Ijara Sukuk

GoP Ijarah Sukuks are medium term Shariah compliant bonds issued by the Governmentof Pakistan and sold through the State Bank of Pakistan via periodic auctions.Salient Features are:

Issued in 3 year tenor(currently)

Floating rate instrument


Semi-annual coupon payments(Currently linked to weighted average 6monthT-Bill rate)

Withholding tax is deducted at source @10% by SBP

Non paper instruments

Negotiable instruments and traded in the secondary market Both the principal and the coupon payments are guaranteed by the Government of

Pakistan.

Islamic mode of investment

Sovereign Bond

4


5/15


A debt security issued by a national government within a given country and denominatedin a foreign currency. The foreign currency used will most likely be a hard currency, andmay represent significantly more risk to the bondholder.The government of a country with an unstable economy will tend to denominate its bondsin the currency of a country with a stable economy. Because of default risk, sovereign

bonds tend to be offered at a discount. Brady bonds, which are issued by governments indeveloping countries, are a popular example of sovereign debt securities.This is one of the many risks that an investor faces when holding forex contracts.Additionally an investor is exposed to interest-rate risk, price risk and liquidity riskamongst others.

How to invest in Government securities?

Customers interested in buying Government of Pakistan Securities, need to follow thesteps stated below:In order to open an IPS account, customer must have a bank account.

The customers will submit a duly filled IPS Account Opening Form(Form A) along with the required documents to their account maintain branch (Pleasesee the attachedList of Required Documents),After the IPS account has been opened, the customers can invest in GOP securitiesthrough one of the Following modes: Primary Market (i) Competitive Bid,(ii)Non Competitive Bid (NCB )through filling theForm B; Secondary Market through filling the Form C.

Government Agencies:

Govt. agencies like WAPDA also issue the fixed income securities. The investorhas opportunity to invest in bonds in Pakistan. There are many bonds with different timeto maturity. The interest payment is fix and assured. In case of non payment of interestafter the regular interval the investor/ bond holder could sue the company issuing thebond. At the time of maturity the bond amount as well as interest payment. Thebondholder has also the right to convert the bond into cash. Firms like WAPDA, NDFC,BEL, PICIC issue the corporate bonds for public.

Municipal bonds

A debt security issued by a state, or county to finance its capital expenditures. Municipalbonds are exempt from federal taxes and from most state and local taxes, especially ifyou live in the state in which the bond is issued.Bond issued by a state, city, orlocal government. Municipalities issuebonds toraise capital for theirday-to-dayactivities and for specific projects that they might beundertaking (usually pertaining to development of local infrastructure such as roads,sewerage, hospitals etc).

5
http://www.investorwords.com/9181/City.htmlhttp://www.investorwords.com/2866/local.htmlhttp://www.investorwords.com/16458/government.htmlhttp://www.investorwords.com/2651/issue.htmlhttp://www.investorwords.com/521/bond.htmlhttp://www.investorwords.com/694/capital.htmlhttp://www.investorwords.com/12775/day_to_day_DTD.htmlhttp://www.investorwords.com/92/activity.htmlhttp://www.investorwords.com/3893/project.htmlhttp://www.investorwords.com/2464/infrastructure.htmlhttp://www.investorwords.com/9181/City.htmlhttp://www.investorwords.com/2866/local.htmlhttp://www.investorwords.com/16458/government.htmlhttp://www.investorwords.com/2651/issue.htmlhttp://www.investorwords.com/521/bond.htmlhttp://www.investorwords.com/694/capital.htmlhttp://www.investorwords.com/12775/day_to_day_DTD.htmlhttp://www.investorwords.com/92/activity.htmlhttp://www.investorwords.com/3893/project.htmlhttp://www.investorwords.com/2464/infrastructure.html


6/15


Interests on municipal bonds is generally exempt from federal tax.There are two common types of municipal bonds:

General obligation

Revenue.

General Obligation (GO) bonds are unsecured municipal bonds that are simply backedby the full faith and credit of the municipality. Generally, these bonds have maturities ofat least 10 years and arepaid off with funds from taxes or otherfees.Revenue bonds are used to fund projects that will finally create revenue directly, such asa toll road orlease payments for a new building. The revenues from the projects are usedto pay offthe bonds. In some cases the issuer is not obligated to pay interest unless acertain amount of revenue is generated. Municipal bonds usually come in $5,000parvalues and usually require a minimum investment of $25,000 in order to get thebest pricealso called muni.

Corporate bond

A bond issued by a corporation; carries no claim to ownership and pays no dividends butpayments to bondholders have priority over payments to stockholders; "a corporate bond is asafer investment than common stock in the same company".Corporate bonds are traded on major exchanges and are taxable.

Corporate bonds are rated as to their risk. The higher the risk, the higher the return thecorporation must promise.They are less safe than government bonds, since there is a chance the company can go bankruptand default on the bond.

Term Finance Certificates

The corporate bond market exists in Pakistan in the form ofTerm Finance Certificates.TFCs are based on legislation enacted in 1984, which authorized the issuance of

redeemable capital securities. As a debt instrument, the TFC is slightly different from thetraditional corporate bond because it was specifically designed to comply with ShariaLaw. The key difference is that the TFC substitutes the words "expected profit rate" for"interest rate."Following are some featured of term finance certificates

Secured or un-secured

Short Term (Maturity/ life up to 12 months)

Long Term (Maturity/ life beyond 12 months)

Role-over at maturity (containing call and put option) Bullet payment i.e. repayment of principle amount in lump sum.

6
http://www.investorwords.com/2531/interest.htmlhttp://www.investorwords.com/1823/exempt.htmlhttp://www.investorwords.com/1895/Federal.htmlhttp://www.investorwords.com/5100/type.htmlhttp://www.investorwords.com/3373/obligation.htmlhttp://www.investorwords.com/5180/unsecured.htmlhttp://www.investorwords.com/2109/full_faith_and_credit.htmlhttp://www.investorwords.com/3569/paid.htmlhttp://www.investorwords.com/2130/funds.htmlhttp://www.investorwords.com/5972/taxes.htmlhttp://www.investorwords.com/1922/fee.htmlhttp://www.investorwords.com/4256/revenue_bond.htmlhttp://www.investorwords.com/2121/fund.htmlhttp://www.investorwords.com/9454/directly.htmlhttp://www.investorwords.com/2749/lease.htmlhttp://www.investorwords.com/4254/revenue.htmlhttp://www.investorwords.com/10568/pay_off.htmlhttp://www.investorwords.com/205/amount.htmlhttp://www.investorwords.com/7067/come_in.htmlhttp://www.investorwords.com/3611/par_value.htmlhttp://www.investorwords.com/3611/par_value.htmlhttp://www.investorwords.com/10896/require.htmlhttp://www.investorwords.com/12208/minimum_investment.htmlhttp://www.investorwords.com/3807/price.htmlhttp://www.investorwords.com/2531/interest.htmlhttp://www.investorwords.com/1823/exempt.htmlhttp://www.investorwords.com/1895/Federal.htmlhttp://www.investorwords.com/5100/type.htmlhttp://www.investorwords.com/3373/obligation.htmlhttp://www.investorwords.com/5180/unsecured.htmlhttp://www.investorwords.com/2109/full_faith_and_credit.htmlhttp://www.investorwords.com/3569/paid.htmlhttp://www.investorwords.com/2130/funds.htmlhttp://www.investorwords.com/5972/taxes.htmlhttp://www.investorwords.com/1922/fee.htmlhttp://www.investorwords.com/4256/revenue_bond.htmlhttp://www.investorwords.com/2121/fund.htmlhttp://www.investorwords.com/9454/directly.htmlhttp://www.investorwords.com/2749/lease.htmlhttp://www.investorwords.com/4254/revenue.htmlhttp://www.investorwords.com/10568/pay_off.htmlhttp://www.investorwords.com/205/amount.htmlhttp://www.investorwords.com/7067/come_in.htmlhttp://www.investorwords.com/3611/par_value.htmlhttp://www.investorwords.com/3611/par_value.htmlhttp://www.investorwords.com/10896/require.htmlhttp://www.investorwords.com/12208/minimum_investment.htmlhttp://www.investorwords.com/3807/price.html


7/15


8/15


the firm at a specified price for a given time period. The warrants make the debenturemore desirable which lowers its require yield.

Zero Coupon Bond

Zero coupon bonds is bought at a price below its face value, and the face value is repaidat the maturity date. As its name mention zero coupon bond it does not make any interestpayment it just pays off the face value.

Subordinate BondA subordinate bond may be an unsecured bond, which has no collateral. Should

the issuerbe liquidated, all secured bonds and similardebts must be repaid before thesubordinated bond is repaid. A subordinate bond carries higherrisk, but also payshigherreturns than other classes.Subordinate bonds are similar to debentures, but in the case of default, subordinated

bondholders have claim to the asset of the firm only after the firm has satisfied the claimof all senior secured and debenture bondholders. Subordinated bonds are categories insenior subordinated, subordinated and junior subordinated bonds. Junior subordinatedbonds have the weakest claim of all bondholders.

Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earningsthan common stock. Preferred stock generally has a dividend that must be paid out beforedividends to common stockholders and the shares usually do not have voting rights.

Preferred stock have become attractive investments for financial corporations. Becausecorporations can exclude 80 percent of inter company dividends from taxable income.For example: corporations that owns preferred stock of another firm and receipts RS. 100in dividends can exclude 80% of this amount and pay taxes on only 20% of it (RS 20)Assuming a 40% tax rate, the tax would only be RS 8 or 8% versus 40% on otherinvestment income. Due to this tax benefit, the yield on high-grade preferred stock istypically lower than that on high rate bonds.

Risks in Fixed Income Securities Interest Rate Risk

Reinvestment Risk

Credit Risk Event Risk

Inflation Risk

8
http://financial-dictionary.thefreedictionary.com/Unsecured+Bondhttp://financial-dictionary.thefreedictionary.com/collateralhttp://financial-dictionary.thefreedictionary.com/Issuerhttp://financial-dictionary.thefreedictionary.com/Secured+Bondshttp://financial-dictionary.thefreedictionary.com/Debtshttp://financial-dictionary.thefreedictionary.com/Repaidhttp://financial-dictionary.thefreedictionary.com/Riskhttp://financial-dictionary.thefreedictionary.com/Returnshttp://financial-dictionary.thefreedictionary.com/Unsecured+Bondhttp://financial-dictionary.thefreedictionary.com/collateralhttp://financial-dictionary.thefreedictionary.com/Issuerhttp://financial-dictionary.thefreedictionary.com/Secured+Bondshttp://financial-dictionary.thefreedictionary.com/Debtshttp://financial-dictionary.thefreedictionary.com/Repaidhttp://financial-dictionary.thefreedictionary.com/Riskhttp://financial-dictionary.thefreedictionary.com/Returns


9/15


Equity Instrument

Common Stock

A security that represents ownership in a corporation. Holders of common stock exercise controlby electing a board of directors and voting on corporate policy. Common stockholders are on thebottom of the priority ladder for ownership structure. In the event of liquidation, commonshareholders have rights to a company's assets only after bondholders, preferred shareholders andother debt holders have been paid in full.If the company goes bankrupt, the common stockholders will not receive their money until thecreditors and preferred shareholders have received. This makes common stock riskier than debt orpreferred shares.

Depository receipts

A depositary receipt is a negotiable financial instrument issued by a bank to represent aforeign company's publicly traded securities. The depositary receipt trades on a localstock exchange. DR investors will be able to gather the benefits of these

usually higher risks, higher return equities Negotiable (transferable) financial security

DR is in the form of equity

physical certificate

Special Equity Instruments/Options

In addition to common stock investment, it is also possible to invest in special equityinstruments, which are securities that have a claim on common stock of a firm. Thiswould include options rights to buy or sell common stock at a specified price for a statedperiod of timeTwo kinds of options instruments areWarrantPuts and calls

Warrants

A warrant is an option issued by a corporation that gives the holder the right to acquire ofa firms common stock from the company at the specified price with in a predefined timeperiod. The warrant does not represent ownership of the stock , only the option to buy thestock.

Puts and Calls

9


10/15


A call option is different from warrant because it is not issued by the company butanother investor who is willing to assume the other side of transaction . options aretypically valid for a shorter time period. Call options are generally valid for less than oneyear. The holder of put option has a right to sell a given stock at a specified price during aselected time period. Puts are useful to investors who own the stock and want protection

from a price decline.

Future contracts

Futures contracts are also used as an investment alternative. This also related to thepurchase or sale of securities but at some future date but the price fixed today. Futuredate is according to normally within one calendar month. Every six months on the base ofeligibility criteria approved by the SECP at the futures counter the numbers and thenames of companies are traded to be determined. These contracts expire in less than oneyear.

Investment companies

Normally investments are made by acquiring securities from government entity, acorporation, or another individual. Investment also made indirectly by buying shares inan investment company also called mutual funds. Distinguished between investmentcompanies by the types of investment instrument they acquire

Money Market Fund

Money market fund is a mutual fund that invests its assets only in the most liquid of

money instruments. They are the safest for the beginner investor. They are the easiest, leastcomplicated to follow and understand. Money market funds represent an investment tool for the beginninginvestor. They are the most basic and conservative of all the mutual funds available.

Safety of principal, through diversification and stability of the short-term portfolioinvestments

Total and immediate liquidity, by telephone or letter

Better yields than offered by banks, 1% to 3% higher

Low minimum investment, some as low as $100

Generally, no purchase or redemption fees, no-load funds

Income Funds

The objective of income mutual funds is to seek a high level of current incomeappropriate with each portfolio's risk potential. In other words, the greater the risk, the

10


11/15


greater the potential for giving income yields, but the greater the risk of principal loss aswell.The risk is very low when the fund is invested in government obligations, blue chipcorporations, and short-term agency securities. The risk is high when a fund seeks higheryields by investing in long-term corporate bonds, offered by new, undercapitalized, risky

companies.

Income and Growth Funds

The primary purposes of income and growth funds are to provide a steady source ofincome and reasonable growth. Such funds are ideal for retirees needing a supplementsource of income without leaving growth entirely.

Growth and Income Funds

The primary objectives of growth and income funds are to seek long-term growth of principal and

reasonable current income. By investing in a portfolio of stocks believed to offer growth potential plusmarket or above - market dividend income, the fund expects to investors seeking growth of capital andmoderate income over the long term (at least five years) would consider growth and income funds.

Balanced Funds

The basic objectives of balanced funds are to generate income as well as long-termgrowth of principal. These funds generally have portfolios consisting of bonds, preferredstocks, and common stocks. They have fairly limited price rise potential, but do have ahigh degree of safety, and moderate to high income potential.Investors who desire a fund with a combination of securities in a single portfolio, and

who seek some current income and moderate growth with low-level risk, would do wellto invest in balanced mutual funds.

Growth Funds

Growth funds are offered by every investment company. The primary objective of suchfunds is to seek long-term appreciation (growth of capital). The secondary objective is tomake one's capital investment grow faster than the rate of inflation. DGrowth funds are best suited for investors interested primarily in seeing their principalgrow and are therefore to be considered as long-term investments - held for at least threeto five years. Candidates likely to participate in growth funds are those willing to accept

moderate to high risk in order to attain growth of their capital and those investors whocharacterize their investment as "fairly aggressive."

Index Funds

The intent of an index fund is basically to track the performance of the stock market. Ifthe overall market advances, a good index fund follows the rise. When the market

11


12/15


declines, the index fund also declines . Index funds' portfolios consist of securities listedon the popular stock market indices.It is also the intent of an index fund to materially reduce expenses by eliminating the fundportfolio manager. The securities in an index mutual fund are identical to those listed bythe index it tracks, thus, there is little or no need for any great turnover of the portfolio of

securities. An index mutual fund may never outperform the market but it should not lagfar behind it either. The reduction of administrative cost in the management of an indexfund also adds to its profitability.

Sector Funds

In the case of sector funds, the portfolios consist of investment from only one sector ofthe economy. Sector funds concentrate in one specific market segment; for example,energy, transportation, precious metals, health sciences, utilities, leisure industries, etc. Inother words, they are very narrowly based.Investors in sector funds must be prepared to accept the rather high level of risk natural in

funds that are not particularly diversified. Any measure of diversification that may existin sector funds is attained through a variety of securities. Substantial profits are attainableby investors enough to identify which market sector is ready for growth.

Specialized Funds

Specialized funds is similar to sector funds in most respects. The major difference is thetype of securities that make up the fund's portfolio. For example, the portfolio mayconsist of common stocks only, foreign securities only, bonds only, new stock issuesonly, over - the - counter securities only, and so on.Those who are still novices in the investment are should avoid both specialized and sector

funds or the time being and concentrate on the more traditional, diversified mutual fundsinstead.

Islamic Funds

In case of Islamic Funds, the investment made in different instruments is to be in linewith the Islamic Shariah Rules. The Fund is generally to be governed by an IslamicShariah Board. And then there is a purification process that needs to be followed, as someof the money lying in reserve may gain interest, which is not desirable in case of Islamicinvestments.

Direct Real Estate Investment

More investor view real estate investment as an interesting and profitable investmentalternative. The most common type of direct real estate investment is the purchase ofhome. Today it is considered most profitable investment.Different types of direct real estate investment are

Raw land

12


13/15


Land development

Rental property

Agriculture

Raw land

Another direct real estate investment is the purchase of raw land with the intention ofselling it in future at profit. It provides more return on investment and has a low chancesof risk in the form of losses.

Land development

Land development can involve buying raw land, dividing it into individual lots, andbuilding houses on it or building a shopping mall. This is a practical form of investmentbut requires a substantial commitment of capital, time and expertise. Risk can be higher

in the commitment of time and capital, the rate of return also higher in form of successfulhousing or commercial development.

Agriculture

In some ways, farmland is even better than gold or silver. At least farmland is anbasically useful thing. It provides a tangible yield in the form of good things from theearth. Investment has gone inAnimal husbandry and livestock development,Dairy farming,Poultry birds-raising,Meat processing,Preservation of shelf lives of fruits and vegetables,Ginning and rice milling, etc.

Rental property

Many investors with an interest in real estate investing acquire apartment building andhouses with low down payments, with the intention of deriving enough income from therents to pay the expenses of structure, including mortgage payments. Rental propertyprovide a cash flow and an opportunity to profit from the sale of the property.

Low-Liquidity Investment

These investments have very poor liquidity and financial institutions do not prefer thembecause of the illiquidity and high transaction cost compared to stocks and bond. Many ofthese assets are sold at auction. Transaction costs are high because there is generally no

13


14/15


market for these investments, so local dealer must be compensated for added carryingcosts and the cost of searching for buyers or sellers.Some low liquidity investments are following

Antiques

Art

Coins and stamps Diamonds

Antiques

The greatest returns from antiques are earned by dealers who acquire them at estate salesor auctions to redecorate and to sell at a profit. Many serious collectors enjoy good ratesof return. The high transaction cost and liquidity of antiques is the cause of low profit thatthe individual may expect to earned when selling these pieces

Art

Investing in art typically requires good knowledge of art and the art world. A largeamount of capital to acquire the work of well known artists, patience and ability to absorbhigh transaction cost. It is difficult for small investors to get returns that compensate forthe uncertainty and liquidity. Some paintings have increased significant in value andthereby generated large rates of return for their owners.

Coins and Stamps

Many individual enjoy collecting coins and stamps as a hobby and as an investment. The

market for coins and stamps is fragmented compared to stock market but it is more liquidthen the market for art and antiques.

Diamonds

Diamonds are also considered as a good and beneficial investment in Pakistan for the

investors from many periods. Diamond great feature is that it is used for years

14


15/15


without decrease in its value.Diamonds are considered as the most liquidinvestment.Profit on retail sale diamond is high so try to sale it on retail bases.

15