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Investment Basics

Investment is about putting your money to work now to provide a source of income and capital for the future. It can help you to both create and preserve your wealth. By taking an appropriate level of risk you may have the opportunity to earn potentially higher long-term returns. It is important to remember that the value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Most individuals invest in order to generate a profit or positive return over a reasonable time frame. The foundation of any successful investment strategy is a clear understanding of your short, medium and long-term financial objectives as the investment strategy you select will be based on the your financial objectives.

There are many different ways you can go about making an investment. This includes putting money into stocks, bonds, mutual funds, real estate, gold etc. The point is that no matter the method you choose to invest, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it’s the most important concept for you to understand.

Understand your Needs

Even though investors are always trying to make money, they come from diverse backgrounds and have different needs. Therefore investment solutions and methods should be personalized for each investor.

We will explore three main factors that determine the optimal path for an investor:

Investment Objectives

Investors have a few primary objectives: safety of capital, regular /stream of income, or capital appreciation amongst others. These objectives depend on a person’s age, stage or position in life, and personal circumstances.

A 65-year-old widow living off her retirement savings is far more interested in preserving the value of investments than a 33-year-old business executive.

The widow needs income from her investments to survive, she cannot risk losing her investment, However the young executive has time on his side and can therefore take more risk.

Time Horizon

  • Short Term

  • Medium Term

  • Long term

As a general rule, the shorter your investment horizon, the more conservative you should be. If you are investing for a long-term objective like retirement and you are still young, then you have time to be more aggressive in your approach and invest in high risk-high reward asset classes like stocks. At the same time, if you start young, you have the power of compounding on your side!

On the other hand, if you are about to retire, then you may opt for a more conservative approach as the opportunity to recover losses on your investments is limited in case of any losses and therefore it is critical to be safe.

Risk Profile

When investing, you need to know how much volatility you can stand to see in your return on investments.

Figuring this out is difficult, but there is some truth to an old investing maximum: you’ve taken on too much risk when you can’t sleep at night because you worry about your investments.

Ask your investment advisor to conduct a thorough risk profiling for you to help make more informed investment decisions.

Asset Classes

  • Equities

  • Fixed Income

  • Cash

  • Commodities

  • Real Estate

Mutual Funds

A Mutual Fund is a single portfolio of investments where investors put their money to be managed by an asset management company on behalf of its many investors. This allows each investor access to a professional managed pool of funds.

Fund Manager invests the fund’s capital in profitable avenues and attempt to earn a return for the fund’s investors. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them.

Benefits

  • Professional management

  • Diversification

  • Liquidity

  • Affordability

  • Tax Benefits

  • Return potential with convenience

Types of Mutual Funds

An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices. A Close-ended Fund has a specified maturity period, which generally ranges from 2 to 10 years. The fund is open for subscription only during a specified Initial Public Offer (IPO). Investors can invest in the scheme at the time of the IPO.

Return Generation

A fund investing in debt requires interest payments at specific times. A fund investing in the stock of corporation receives whatever cash dividends that company pays. Interest payments and dividend income by law must be passed through to the fund’s shareholders i.e. to you. You can even have that income reinvested in more fund shares. Also, when a fund actually sells a stock or bond that has increased in value, the fund realizes a capital gain. Periodically, the fund will distribute such gains to its shareholders in the form of dividend warrants unless you have instructed it to reinvest the gains.

Other Important concepts

Net Asset Value (NAV)

NAV is calculated by summing the current market values of all securities held by the fund, adding in cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding. Net Asset Value is the market value of the assets of the scheme minus its liabilities. Per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Front End Load

Front End Load is a charge collected by few Mutual Funds at the time of investment. A small % is charged on the investment. These loads are generally charged on Income and equity based funds.

Back End Load

Back End Load is a charge collected by few Mutual Funds at the time of redemption. A small % is charged when the investor redeems their investment.

Tax Benefit

Regulation

As per section 63 of the income tax ordinance 2001, an eligible person joining AL Habib Pension Fund and AL Habib Islamic Pension Fund can avail tax credit up to 20% of the (eligible) person's taxable income for the relevant tax year. This information is for general purpose only. In view of Individual nature of tax consequences each investor is advised to consult with his/her tax advisor with respect to specific tax consequences of investing in the Fund.

How to claim

To claim tax credit amount following can be done:

  • Salaried individual can inform their HR or Finance Department about their investments by submitting the account statement to adjust their tax credit amount from the monthly income tax deductions.

  • Self-employed individual can adjust their tax payable by showing investment in their wealth statement at the time of Income tax return filing.

SECP Investor Education

Mutual Funds

For mutual funds, Please click here

Pension Funds

For Pension funds,Please click here