F U N D A M E N T A L S - · PDF filefinancial objectives. ... intelligently through the various a v enu of i tm . By Farooq Ahmed, Head of Retail Sales. ... live Ilife on your terms

F U N D A M E N T A L SSemi-Annual Is sue - Vol 1 (Jan - Jun 09)

INVESTOR’S GUIDE 2009

Investing inturbulent times

Why it’stime

to buy

PortfolioStrategyfor 2009

Trust the ExpertsCall 0800-00026 SMS ‘INVEST’ to 2600

w w w.UBLFunds.com [email protected]

OUR COMMITMEN T TO OUR INVESTORSIS RE TURNED BY THE

THEY HAVE IN US

UBL Fund Managers is proud to be the largest Asset Management Company in Pakistan managing open-end mutual funds in the private sector.

- As of January 1, 2009 -

TRUST

F U N D A M E N T A L S

06 Portfolio Strategy 2009

Contents

So we know we should invest, we know we needto get going as soon as we can and we know weshould not put all our eggs in one basket. But whatare those baskets, which should we choose andhow much should we put in each?

10 Riding out the stock market

Planning and recognizing next steps are often themost important parts of successful investing. TheCFA Institute offers top five facts that should beconsidered when investing in turbulent markets.

14 Saving Taxes. Legally

Investing in equities is like riding a stallion. If youdon’t harness the horse properly, you’ll have a hardfall. But do it well and it’s the best way to get toyour destination.

16 The art of investing in turbulent markets

Fortunately, the Pakistani tax system is structuredin a way that it still provides relief for individualstrying to save on taxes. You just need to know whereto look.

“ UBL Fund Managers as part of itscommitment to it clients and generalinvesting public is at the forefront ofinvestor awareness and education.FUNDAMENTALS is our effort to keepour valued investors abreast of makingquality investment decisions.

Complex financial jargon can confusemany people into inaction but this plainEnglish guide sets out the fundamentalfacts you need to get started.

This issue starts out with an analysis ofthe risk s and rewards of the maintypes of assets that individual saversand investors can use to accumulatewealth. It also talks about how delaycan prove a costly mistake and whysimple mathematics strongly suggestthat the sooner you implement astrategy for saving and investment, theeasier it will be to achieve yourfinancial objectives.

I am confident that this issue will addvalue to your decision making. In caseyou have any comments feel free todrop me a line at [email protected] investing in 2009!

Message from the CEO

02 Save. Invest. GrowThe concept of savings and investments hasnoticeably change d ove r the years.The time has come when every individual andprospective investor should realize the significanceof these two words and learn to differentiatebet ween them.

”Mir Muhammad Ali, CFAChief Executive, UBL Fund Managers

02UBL Fund Mana gers

Save. Invest. Grow.

Evolution of Lifestyle

Today it is essential to look into ourlives and analyze our needs for thepresent and the future. The situationhas changed from the period of ourparents and grandparents whenthey considered their savings wouldsuffice through their lifetime.

Though the core ideas behind

The concept of savings and investments has noticeably changed over the years.The time has come when every individual and prospective investor should realize the

significance of these two words and learn to differentiate between them.

savings have remained much thesame such as emergency needs andsocial needs, there has been theintroduction of aspiration needs aswell. These may include flyingabroad for holidays, maintaining acertain lifestyle, quality educationfor children and various personalgoals.The fact that aspirations have

become realizable has furthered thisneed. The result of this change hasbeen an increased need of money,which at times becomes difficult tobe met by simply saving.

Thus the time has come to saveintelligently through the variousavenues of investment.

By Farooq Ahmed, Head of Retail Sales

Getting Started

Investing intelligently, with asensible plan and from a young agecan make you seriously wealthy. Notjust in terms of money but in themost important things that moneycan buy – the time and freedom tolive life on your terms.

There are no short cuts to financialfreedom, no get-rich-quick schemeson which to rely. The good news isthat you do not need any. Focusinstead on the steady, relentlessaccumulation of wealth throughintelligent investment. That maysound mundane but it has the meritof being both realistic andachievable.

Riding the rollercoaster ofinvestment

Since the establishment of markets,investors have been looking for the‘perfect investment’, an investmentthat offers high returns with lowrisk exposure. It is an establishedfact that Risk and Return go hand-in-hand and such a ‘perfectinvestment’ is not possible.

Diversify to minimize risk

The first rule of intelligent investingis to live to fight another day. Theonly certain way of not gettingwiped out is to ensure that youspread your risks prudently.Diversification is an importantfeature of any intelligent approachto investment.

According to the ‘Modern PortfolioTheory’ (MPT) by Harr y Markowitz,

analyzing the risk and return of asingle security is not enough. Thetheory introduces the concept ofdiversification under which aportfolio must invest in a numberof carefully chosen securities,reducing the risk of the portfolio.

In lay-man terms, the risk of aportfolio with a single security willbe higher than the risk inherent ina portfolio with multiple securities(provided that the securities are notdirectly related).

The magic of compounding

Getting rich slowly and inevitably isnot complicated. It can be achievedsimply by harnessing the financialworld’s best-kept secret – thealmost magical power ofcompounding.

Albert Einstein called compoundingthe eighth wonder of the world. Hewas right. Compounding is aprofoundly power ful force and usedwith skill and patience it will giveyou and your family the warm glowof financial security for the rest ofyour lives.

It is a simple concept. If you increasea sum of money by the samepercentage amount each year, themonetary value of each annualincrease gets progressively larger.Grow Rs.1,000,000 by 10 percentand the first year’s increase isRs. 100,000. The following year,however, the same 10 percent riseis worth Rs. 110,000.

Apply the same grow th rate for 20years and the 10 percent rise in the

final year will be worth more thanRs. 600,000 – six times the firstyear’s increase.

Beware the investor’s enemynumber one - inflation

Even a modest rate of inflation,compounded year after year, candrastically reduce the purchasingpower of the money you havesaved. It is important to look forinvestment avenues which willenable you to me et inflation andprotect your purchasing poweralong with aiding you to generate asustained income.

Building a Portfolio

If you’ve shown even a passinginterest in the business pages in thelast six months you may have comeaway with the impression that thefinancial world is complex,incomprehensible and dangerous.With lurid headlines about liquidityconstraints and stock marketdebacles, savers and investors havestarted worr ying about things theynever even knew existed.

No one should pretend that theturmoil in the world’s financialmarkets is not a real problem. Thefear and uncertainty it has createdhas shaken the world’s financialsystem. The greatest damage thatthe turbulence could cause,however, would be if it were toundermine our faith in saving andinvesting for the future. Most of uscan leave complex formulae to theprivate-equity managers. A portfoliobuilt around cash, saving schemes,mutual funds, property, and equitieswill continue to ser ve our purposes.Throw in a commodity such as gold

03UBL Fund Manag ers

The first rule of intelligent investing is to live to fight another day.The only certain way of not getting wiped out is to ensure that youspread your risks prudently.

04UBL Fu nd Manager s

and you have more than coveredthe waterfront.

Risk and reward profiles ofcash, saving schemes, equitiesand property

The main thing to understand aboutall these assets is that they offer theprospect of different levels ofreward for different levels of risk.There are no more free lunches ininvestment than in any other walkof life, so if you are attracted by thethought of bigger returns you mustaccept the possibility that you willmake bigger losses along the way.

The least risky asset of all is cash.There are only two threats to a cashinvestment – someone stealing it orinflation nibbling away at its buyingpower. Because risks are low, thereturns usually are too, although intoday’s volatile markets manyinvestors will consider a high-interestbank account offering 8 percent ayear or more to be an attractiveproposition. However, do considerthat interest earned from bankdeposits is subject to deduction of10 percent withholding tax.

Sometimes having easy access tocash may be a good idea as anyportfolio will want liquid funds totake advantage of opportunities inother assets. Also it is always a goodidea to have some cash set aside incase of emergencies. Enough tocover three months’ living expensesis often a rough guide to how muchyou need. And make sure you canwithdraw it when you need to,without penalties.

Running cash a close second interms of security are saving schemesoffered by banks, and the onesoffered by the Government ofPakistan, chiefly the National SavingSchemes (NSS) and Defence SavingCertificates (DSS). These schemes,generally fixed-deposit in nature,offer a fixed income and guaranteerepayment of the sum initiallyinvested. The best time to invest insaving schemes is when interestrates are high. However, incomefrom these schemes is subject to

deduction of withholding ta x.Additionally taking out yourinvestment before the maturityperiod generally requires paying apenalty.

An alternative to saving schemesare money market and fixed incomemutual funds offered by A ssetManagement Companies. Theseinvestment products can provideinvestors with a regular income orconsistent capital appreciation. Thereturn offered by these fundsalthough not ‘fixed’ is generallyhigher than that offered by fixed-deposit schemes. Additionally, thereturn realized on investment is taxfree under existing tax-law, and youcan withdraw your investment inpart or whole at any time, generallyat no penalty.

Money market and fixed incomemutual funds are riskier than cashand savings schemes, as they canexperience a degree of volatility inthe short-term, but they are theleast risky category of mutual funds.The level of risk associated with aparticular fund can be gauged bythe securities it holds and theexpertise and backing of the fundmanager and company managingthe fund.

Direct equity and equity-basedmutual funds are considerably morerisky than either of the investmentavenues mentioned above; becausethere is no guarantee of principalprotection. That is why they aretermed risk capital. When you buya share you take part-ownership ina company and you share in itsfortunes thereafter, both good andbad. Investors are prepared toshoulder the increased risk of sharesbecause, as an owner of theunderlying business, they participatedirectly in the rising value of asuccessful company and receivetheir share of its growing earningsin the form of a rising dividend.Despite the volatile and thereforerisky nature of equities, they areconsidered around the world, atime-tested vehicle for accumulatingwealth over the long-term.

Like equities, property or real estate

is a real asset. Its value can rise andfall and so can the income stream itgenerates. Property investment canhelp an investor reduce the riskposed by inflation because the rentscharged by the owner of a buildinggenerally rises in line with the costof liv ing.

However investing in propertygenerally requires a huge sum ofcapital, and being a relatively illiquidasset it can take months or evenyears to dispose of property, makingit difficult to time the sale to youradvantage.

Putting theory into practice

Markets are inherently unpredictableand even experienced investorshave difficulty spotting the bestentr y and exit levels. Because ofthis, investors should not worr y toomuch about the short-term ups anddowns of markets. Over time,markets have tended to risebecause they reflect the growingwealth of the world and it wouldbe surprising if this were not tocontinue.

Expert Advice

Deciding to become an investor is,of course, just the first step. As wehave seen, there are countlessdecisions to be taken about timing,asset allocation and the selectionof individual investments whenbuilding a portfolio. A good advisercan help you with these crucialquestions.

All parents desire to provide financial support for each milestone in their child’s life, be it higher education ormarriage. But given the increase in costs likely to occur with ever y passing year, you need a little bit of planning,regular saving and consistent investing to take care of these future needs.

The Mera Kal - Children Savings Plan is a systematic investment plan that will help you save for your child’s futurein an easy and hassle-free way.

The plan invests in funds managed by UBL Funds Managers - UGIF & USF Minimum Investment: Rs: 30,000 I Minimum Subsequent Investment: Rs: 2,500 (per month) Allows you to choose your own term for the plan (Minimum Term: 5 years) Built-in Insurance Coverage ensures the continuity of the plan in case of parent’s death or disability

Your child will grow fast.Your savings should grow faster.

Disclaimer: The investment product s marketed herein are not bank deposits, obligations of, or guaranteed by UBL which is acting solely as a distributorfor UBL Fund Mangers. All investments in mutual funds are subject to market risks. The NAV of the funds may fluctuate based on market conditions. Pastper formance is not indicative of future results. Please read the Offering Document(s) of the underly ing Fund, i.e. UGIF and USF and the Supplementar yOffering Document of the Plan prior to investing.

Trust the ExpertsCall 0800-00026 SMS ‘INVEST’ to 2600

w ww.UBLFunds.com [email protected]

The construction of a portfolio is acontinuous activity as even the bestportfolios have to be constantly finetuned in accordance with thechanges in the prevailing economicenvironment. Also there is no‘perfect portfolio’ that is suitablefor all investors. Investors’ portfoliomust be personalized in accordancewith their risk profile and financial

Portfolio Strategy 2009So we know we should invest, we know we need to get going as soon as we can andwe know we should not put all our eggs in one basket. But what are those baskets,

which should we choose and how much should we put in each?

details. Some of the factors thatmust be taken into considerationwhen constructing a portfolioinclude the investors’ age, income(independent from investmentincome), current savings anddeployable savings, liquidityrequirements over the short andmedium-term, and the objective ofthe portfolio (growth, income or a

combination of both).

Keeping the above factors in mind,it is not possible to recommend oneportfolio for all investors. Therefore,we will present our outlook for themajor asset classes in a way thatinvestors can use this informationto help determine the assetallocations of their portfolios.

By Hasnain Raza Nensey, Chief Investment Officer

06UBL Fu nd Manager s

The recent financial crisis and sell-off in the local and global equitymarkets have brought equity prices to very attractive levels.

07UBL Fund Mana gers

Domestic Equities

The recent financial crisis and sell-off in the local and global equitymarkets have brought equity pricesto ver y attractive levels. The KSE100Index, the standard benchmark forlocal equities, has declined fromalmost 16,000 points to 5,000points, and the stock market istrading at a ‘Price to Earning’ (P.E)Ratio of 4x forward earnings. This issignificantly below the average P.ERatio during the last four yearswhich was over 10x forwardearnings. This makes it an ideal timeto lay the foundations of an equityportfolio, or to add to holdings inan existing portfolio.

When selecting equities, one shouldstrike a balance bet ween high-earnings grow th and dividendyielding companies. Considering theprevailing tough economicconditions, it is appropriate to leantowards low-risk, dividend yieldingblue-chip companies. Also, oneshould consider sectors poised toperform well through differenteconomic cycles. In our view, blue-chip companies in Oil & GasExploration, Fertilizer and PowerGeneration sectors are currentlyoffering attractive dividend yields(approx 20 percent p.a.) as well ascapital gain potential due todepressed prices.

If you do not have the capability ortime to explore through the universeof equities, it is better to investthrough an equity mutual fundwhere a professional fund managermakes the equity selection decisionsfor the investor at a minimal cost.

It is better to invest in equities

gradually, rather than investing allof the deployable capital in a singleshot. This allows for averaging outof buying costs over a range oflevels and therefore reduces thechances of buying at an abnormallyhigh price. An even better way is toenroll in a ‘Systematic InvestmentPlan’ where a set amount is investedin an equity portfolio on a periodicbasis.

Equities have historically (over longtime periods) been the highestreturn asset class and one of thefew that beat inflation, however thereturns come with high, short tomedium-term risks. It can not bestressed enough that investmentsin this asset class must be made withat least a medium-term investmenthorizon. Volatility is a keycharacteristic of equities andinvestors must be ready for it beforeentering this asset class.

Risk: HighReturn: HighInvestment Horizon (Min): 2Y - 5Y

Fixed Income

Individual investors can invest in thisasset class through fixed-rate ‘TermDeposits’ in banks and throughfixed-income mutual funds.

Fixed-rate deposits offer security ofcapital and guarantee a fixed return;they are not sensitive to changinginterest rates. However, taxesapplicable on the returns take a sliceout of the total return.

Interest rates are likely to declineduring the calendar-year 2009.Therefore investors arerecommended to consider some

long-term (3-5 years) TDRs at higherrates available currently.

The returns from fixed incomeinstruments are lower than equities,and are usually lower than inflation.However, the low returns arecompensated by low risk and lowvolatility.

Fixed income mutual funds on theother hand can choose to maintaina floating-rate portfolio andtherefore benefit the investor fromany interest rate hikes.

Fixed income mutual funds havehistorically been low-riskinstruments. However, rapidregulator y changes during the lastfew months have resulted involatility in their returns. The efficientpricing mechanism for fixed incomesecurities is yet to regain balanceand the volatility is expected to stayhigh in the short to medium-term.As the prices converge to morerationale levels, capital gains can beexpected from TFCs (Term FinanceCertificates) which are currentlytrading at discounted values.

It is therefore recommended thatthe investment horizon for investingin fixed income mutual funds shouldbe extended to at least one yearand these funds should not be usedfor cash-management over theshort-term.

Risk: LowReturn: ModerateInvestment Horizon (Min): 6M - 1Y

Real Estate

Real Estate prices have come downconsiderably due to the liquidity

08UBL Fund Mana gers

crunch in the market, therefore it isa good time to invest in this assetclass.

A long-term investment horizon isa key requirement for real-estateinvestments. The asset class is illiquidand may take time to liquidate.

The returns in this asset class havebeaten inflation over the long-term,however, the returns are spreadover a wide range and the maindifferentiating factor is the‘location’.

Risk: ModerateReturn: HighInvestment Horizon (Min): 10Y

Commodities

Commodity prices have declinedsharply in the recent past due to theglobal financial crisis. The returnsfrom this asset class are directlylinked to the demand and supply

dynamics of each commodity.

With the overall economicslowdown expected to prevail overthe next t wo years, the demand isexpected to be low. Therefore anover-weight exposure to this assetclass is not recommended at thispoint.

Commodity markets must beactively followed and traded to reapthe returns of this asset class as theprice movements are usually sparseand volatile. Therefore, in theabsence of any commodity mutualfunds in Pakistan, this asset class isnot recommended for localportfolios.

Gold is an exception to the generalcommodities as it is considered asa relatively low-risk asset forinvestors during times of financialcrisis. Ever since the decoupling ofmajor currencies from the goldstandard in the 70’s, the currencies

in issuance have far out-stripped thegold supply. Therefore the price ofgold is expected to rise, even moreso in times of financial crisis.

Any investments in gold should bemade in the form of gold bullion.The misconception of buying goldjewelry as a proxy for investment ingold must be clarified. The overheadcosts of jewelr y productionsignificantly depress any potentialreturns from this asset class.

Risk: ModerateReturn: HighInvestment Horizon (Min): 1Y

Currencies

Currencies valuations are all relativeand based on the strength andweakness of underlying economies.Active currency trading requires anin-depth understanding of majoreconomies. Currency rates tend tostay range bound for long time

Currencies as an asset class can also be considered a hedge againstthe weakness of the local economy and local inflation.

into consideration this rationalecertain exposure to foreign currencyis recommended.

Over the short term, currencymarkets are expected to remainvolatile as economic data unfoldsacross various regions and given therelatively grim situation in mostregions, it will really be a questionof relative valuations that will makeone currency dominant overanother.

Risk: ModerateReturn: ModerateInvestment Horizon (Min): 1Y

periods and move sharply aftercertain triggers. Therefore timing oftrades is critical for reaping returnsfrom this asset class. In the absenceof any currency-trading funds inPakistan, this asset class isre commended only for qualifiedinvestors who have the necessaryregulatory approvals to do so.

Currency as an asset class can alsobe considered a hedge against theweakness of the local economy andlocal inflation. Funds parked inforeign currency can prove to besafe-havens against local geo-political risk s as well as any suddenlocal currency depreciation. Taking

Suggested Portfolio Allocation

Equity Funds*

Fixed Income:- Term Deposits- Income Funds- GOP Schemes

Real Estate

Commodities (Gold)

Cash**

Conser vative

0%

15%40%30%

0%

0%

15%

Moderate

20%

10%25%15%

15%

5%

10%

Aggressive

30%

0%20%0%

30%

10%

10%

* Those who can make their own equity investment decisions based on fundamental analysis can invest directly in equities

** This can be held in money market funds

09UBL Fund Ma nagers

10UBL Fund Ma nagers

Riding out the stock market

Keeping your money in a bank or a Government savingscheme may seem the safest option but if the interestrate is not high enough, you run the risk that your hard-earned cash will be eaten away by inflation and tax.

While investing in the stock market can be a roller-coasterride in the short-term, over longer periods assets suchas stocks and shares tend to outper form both cashaccounts and inflation.

Investing in equities is like riding a stallion.If you don’t harness the horse properly, you’ll have a hard fall.But do it well and it’s the best way to get to your destination.

To benefit from the potential returns from equities, youcan spread the risk by investing in an equity fund orbalanced mutual fund, where a professional fund managerwill allocate your money across a variety of assets andcompanies. Mutual funds tend to be less volatile than theshares of a single company.

By Ali Alv i, Head of Research

In many ways, the key organ for investing is the stomach, not the brain.What is your stomach going to do when an investment your brain selecteddeclines for a year or two?

11UBL Fund Man agers

Five key principles for successful equityinvesting

Here are five key principles for successful equity investing.Follow them diligently and you could be on your way toharnessing the significant potential that equities offer.

Decide how much risk you can tolerate

In many ways, the key organ for investing is the stomach,not the brain. What is your stomach going to do whenan investment your brain selected declines for a year ortwo?

Consider this: the KSE 100 Index grew from 945 points at1998-end to 14,077 at 2007-end. That’s an averagegrowth rate of over 35 percent p.a. – returns that otherinvestments such as National Saving Schemes, bonds orcash could not easily match. When impressive returns likethese are possible, why would one say that the stomachis the key organ for investors? Well, the growth in theKSE100 Index didn’t happen overnight or in a regularmanner. In fact, short-term declines of over 25 percentwere regularly sprinkled throughout this period. Each timethe market drops, many investors panic and stray fromtheir plan. So the question you need to ask yourself iswhether you have the stomach to ride through volatileperiods of the market in the quest for higher returns.

In other words, you need to appreciate that risk is anessential part of the experience of investing in equities.To get a good feel for how much stomach you have forequities, ask your Investment Adviser to take you througha risk profiling exercise. This will show how much risk youcan tolerate. The following factors will all have a bearingon the result.

Your time horizon - Decide for how long you can haveyour money invested in equities before you need to dipinto it for important outgoings, such as buying a house,paying for your children’s higher education or fundingyour retirement. As a general principle, equity investmentsshould only be considered if your time horizon is over fiveyears. Markets move in cycles and what goes down isquite likely to come up again, but it could take some time.You should be willing to stay focused on your goal throughthese difficult parts of the cycle.

Your attitude to losses - How do you think you would feelwhen your investments get hit temporarily during a volatiletwist of the market? If you are the sort to lose sleep attimes like these, equities are best avoided.

Your investment objective - Think about what your primaryobjective is. Is it to preser ve the value of the savings youhave painstakingly built up over the years or is it to increaseyour savings into something far more substantial overtime?

Your Investment Adviser should discuss these and otherimportant issues with you to get an idea of your appetitefor risk. You can then decide on a mix of assets that wouldsuit your particular circumstances.

Don’t put all your eggs in one basket

Once you set your investment objectives and establishyour tolerance for risk, your Investment Adviser will makesuggestions that would diversify your savings across themain asset classes – equities, bonds and cash.

The principle of diversification holds true within equitiesas well. Investing across a range of companies, sectorsand even markets ensures that you are not reliant on theperformance of any one type of equity and hence, do notrun the risk of having ‘all your eggs in one basket’.Diversification within equities should ideally be consideredat three levels: across stocks, sectors, and markets.

Think time in the market, not timing the market

When share prices start to go down or seem static, it canbe tempting to sell your investments and wait until thingsimprove. Or you may delay making an investment untilyou feel more confident that prices are going up. In theory,‘market timing’, as this is known, is attractive. But inpractice it is rarely successful.

Just as the big falls in stock markets tend to beconcentrated in short periods, the best rises happenquickly. And since these large gains often occur in theearly days of an upward trend, an investor try ing to timethe market is highly likely to miss out. Therefore whatmatters is time, not timing.

While investors may have been concerned by the rising

12UBL Fund Mana gers

and falling stock market over the last eight months, dueto the economic and political instability in the country, itis important to hold on for the ride and not be panickedinto pulling your money out of the market. Attempts totime the stock market by cashing in your holdings canprove expensive.

Invest systematically — through the ups anddowns

One method of successful equity investing is to set up aSystematic Investment Plan (SIP) and stick to it throughall the ups and downs of the market.

If you don’t have immediate access to a large amount ofready cash, investing a regular amount each month canhelp you build-up a lump sum and benefit from the growthpotential of the stock market.

Saving on a regular basis in this way is easy as you treatyour investment as part of your monthly budget. What’smore, you can benefit no matter how the markets areperforming: if the market goes up, the units you already

own will increase in value, if the market goes down, yournext payment will buy more units.

Saving regularly allows you to capitalize on a phenomenoncalled ‘Rupee Cost Averaging’, illustrated in the table givenon the following page. This compares the returns achievedby a lump-sum investor and someone who saves the sameamount ever y month for six months.

The regular saver finishes the period with an investmentthat is worth more than that of the lump-sum investor –even though the starting price, finishing price and averageprice are exactly the same. It sounds unlikely, but it’s true.Check the figures for yourself!

13UBL Fund Ma nagers

Month

1

2

3

4

5

6

Unit Price (Rs.)

20

18

14

22

26

20

AmountInvested (Rs.)

60,000

-

-

-

-

-

Units Bought

3,000

-

-

-

-

-

Total Invested (Rs.)

Average Price Paid (Rs.)

Total No. of Units Bought

Value of investment aftersix months (Rs.)

60,000

20

3,000

LUMP-SUM INVESTOR REGULAR SAVER (SIP)Amount

Invested (Rs.)

10,000

10,000

10,000

10,000

10,000

10,000

60,000

20

3,107

500

555

714

454

384

500

Units Bought

62,14060,000

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28

No. of Years12% 14% 16%

30

The effect of monthly saving

Regular contributions can soon grow into a substantial amount. The graph below shows cumulative returns from amonthly investment of Rs. 2,500 over a 30-year period at different return rates.

Rs. 16.3 milllion

Rs. 10.8 milllion

Rs. 8.1 milllion

14UBL Fun d Manager s

Over last few years, the salarytaxation landscape haschanged radically. Salaries inthe private sector are at theirrecord high, many times morethan the growth of keyindicators of Pakistan’seconomy.

Responding to the changingcircumstances, the Federal Board ofRevenue (FBR) drasticallyrestructured the slab of salarytaxation, keeping the basic canonof progressive taxation on salariesalive as against the flat structure;therefore denting the net disposableincome of the salaries class.

The salar y income slab nowcascades between the lowestincome exceeding Rs. 180,000/-with a ta x rate of 0.50 percent andthe highest tax slab of Rs. 8.65million with the ta x rate as high as20 percent. Many of theseemployees are unable to safeguardtheir rights as taxpayers becausemost of them have never filed returnof their income or lack sufficientinformation on the ways to reducetheir tax incident.

The main five modes of salar yincome are recognized as (i) pay /wage, (ii) allowances, (iii) excessreimbursement of expenditure,(iv) any bulk / lump sum payment /capital receipts affecting theemployment terms of an employee,including golden hand shake (VSS)payment s (v) pension / annuity / orits supplements.

Saving Taxes. Legally.By Rahim Khakiani, Chief Financial Officer & Company Secretar y

15UBL Fund Mana gers

Tax @ 18.5% on the above amount 657,675(A) Marginal tax relief calculation

Rs. 3,550,000 @ 17.5% 621,250 Add 50% of amount exceeding Rs. 3,550,000 2,500

623,750

Marginal relief is applicable and the tax to be paid is 623,750 Tax Credits:

(B) Tax credit on investment in mutual fund 52,637(C) Tax credit on investment in pension fund 87,729

(D) Profit on debt paid on mortgage 87,729(E) Tax credit on donation paid to approved charitable Institution 70,183

298,277

Deduction to other ta xes paid:

(F) Tax on telephone bills 12,000(G) Tax on purchase of motor vehicle 40,000

52,000

Total credits and deductions 350,277

Net tax to be paid 273,473

Other taxes

Tax on telephone bills 12,000

Tax on purchase of motor vehicle 40,000

Total tax incident (paid wisely yet legally) 325,473

Total tax as previously paid by Mr. Nasir 709,675

Savings – Amount 384,202

% 54%

After having understood the basicframework of salary taxation, thenext step could be to identifyopportunity of tax savings that isprovided within the law. By runningthe following illustration, we cansee that the impact can be drastic.

This should be a serious eye-openerfor those who just rely on theiremployer to pay taxes on their salaryand remain ignorant of the avenuesof savings available within the law.Astute employees should be awareof these areas of savings availableto them which can reduce theirtaxes by a healthy margin.

Illustration

Mr. Muhammad NasirAnnual Salar y: Rs. 3,555,000

He pays Rs. 12,000 p.a withholdingtax on account of his telephone bill

He purchased a motor vehicle duringthe year and paid Rs. 40,000withholding tax on it

He paid Rs. 400,000 as donation toapproved charitable institution

He invested Rs. 300,000 in an open-end mutual fund

He invested Rs. 500,000 in aVoluntary Pension Fund (VPS)

He currently owns an apartmentvaluing Rs. 10 million on which he ispaying Rs. 600,000 on account ofinterest expense per year

Now let’s assume that he takes into account the relevant tax credits anddeductions that are permited under the law and recompute his annual taxes.

Assuming Mr. Nasir doesn’t know much about the taxation laws and pays hisannual taxes straight on his salar y income as follows:

18.5% on Rs. 3,555,000, i.e. annual tax on salary Rs. 657,675

Other taxes paid:On telephone bills 12,000On motor vehicle purchased 40,000

Rs. 709,675

Total salary income:

16UBL Fund Manag ers

In the wake of recent marketconditions, the CFA Institute,the global association forinvestment professionals,shares five facts investorsshould know when makinginvestment decisions.

Investors with properly diversifiedportfolios that match their risktolerance are better able to focuson rebalancing their portfolios inresponse to turbulent markets. Evenin times of exceptional market stressthe key fundamentals of investingcan ser ve as sound guideposts.Focusing on these top five facts andseeking the advice of a trustedinvestment professional will helpinvestors stick to their long-terminvestment plan and meet theirfinancial goals.

Having an investment policystatement makes weatheringfinancial uncertainties easier.

From the outset, ever y investorshould form an investment policystatement that ser ves as aframework to guide futuredecisions. A well-planned strategytakes into account several importantfactors including goals, timehorizon, tolerance for risk, amountof investable assets, and plannedfuture contributions.

An investment policy statementconceived in normal marketconditions provides critical guidancein severe market conditions.

The art of investingin turbulent markets

Taken from recent press release issued by the CFA Institute

Actively reviewing one’s portfolio and doing nothing is a betterstrategy than acting on emotions.

17UBL Fund Ma nagers

Knowledge of your risk tolerance ispower.

There is no such thing as risk-freeinvesting, but knowing how muchrisk you are willing and able toaccept is a necessary step in buildingthe portfolio that is right for you. Itmakes the difference bet weensensible investment decisions thatprovide long-term benefits andspur-of-the moment choices thatcan bring poor results.

Determining your appetite for riskinvolves measuring the potentialimpact of a loss on both yourfinancial condition and psyche. Ingeneral, individuals planning forlong-term goals should be willingto assume more risk in exchange forthe possibility of greater rewards.However, their psychologicalmakeup may not allow them to doso. You certainly shouldn’t wait untila sudden or near-term drop in thevalue of your assets to conduct anevaluation of your level of tolerancefor risk. Nonetheless, determiningrisk tolerance involvescontemplating the impact of severefinancial crises that might occur onyour wealth and psyche ever y tenyears or so.

Investing in a diversified portfolioof securities rather than individualstocks mitigates risk.

Investing in a single or few assetclasses increases risk for which aninvestor is not rewarded comparedto investing in an asset type, likemutual funds, that providesdiversification. Investors shouldincorporate different asset classesand investment styles in their

portfolio that tend not to movetogether so that market swings inone part of their portfolio are offsetin another part. Failing to diversifyyour investment may leave youvulnerable to fluctuations in aparticular security or sector. Also,investors should be mindful of notconfusing mutual funddiversification with portfoliodiversification. You may ownmultiple funds but find, on closerexamination, that they are investedin similar industries and even thesame individual securities.

Be careful to avoid investing in toomany products, which can createunnecessarily high fees relative tothe size of your portfolio. It isrelatively easy to create a diversifiedportfolio with only a few properlychosen investment products. Often,this can best be done with theadvice of a professional advisor.

The fundamental principle ofinvesting is buy low and sell high.

So why do so many investors getthat backwards? The main reason is‘performance chasing’. People tendto invest in the asset class that hasrecently performed well. Someonewho has a long-term investmentstrategy, but doesn’t have thetenacity to stick with it has atendency to buy high and sell low.They throw their strategy out thewindow in response to short-termchanges in the market, investingtactically instead of strategically.Actively reviewing one’s portfolioand doing nothing is a betterstrategy than acting on emotions.

When investing in individual stocks,

many professional and noviceinvestors alike have difficultyadmitting they have made a mistakeby selling a stock at loss. Many wantto hang on until they break even.Smart investors realize when theymay never recoup their losses. Notevery investment will increase invalue. Sometimes, it is far better totake the loss and redeploy the assetstoward a more promisinginvestment.

Frequent trading can be costly.

Trading too often cuts intoinvestment returns more thananything else. The solution is a long-term buy-and–hold strategy, ratherthan an active trading approach.

The CFA Institute is the globalassociation for the investmentprofession. It administers the CFA andCIPM curriculum and exam programsworldwide; publishes research;conducts professional developmentprograms; and sets voluntary, ethics-based professional and performance-reporting standards for the investmentindustry.

In order to reach your financial goals, you need to plancarefully. But planning may not be enough. Usingprofessional advisory services will ensure that yourinvestment solutions take account of your investmentobjectives, your risk appetite and your wishes. At UBL FundManagers, we have the expertise and experience to offerinvestment solutions that meet these goals.

Put your trust in the largest Asset Management Companyin Pakistan managing open-end mutual funds in the privatesector.

UBL Fund Managers - Trust the Experts.

Disclaimer: Information presented in this magazine was prepared basedupon information believed to be reliable and is not guaranteed by UBLFund Managers to be accurate, and should not be considered to be all-inclusive. This magazine contains for ward-looking statements thatinvolve risks and uncertainties. This material is for informational purposesonly and should not be construed as an offer or solicitation to buy orsell securities. This information is in summary form and does not purportto be complete. It is intended as a general guide and is not a substitutefor professional advice. The information does not take into accountyour personal needs and financial circumstances and you should considerwhether it is appropriate for you.

FUNDAMENTALS is the semi-annual magazine for existing and potential clients of UBL Fund Managers.

Date of print: February 12, 2009