Why invest in mutual funds?/ What are the benefits of mutual funds?

Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual fund include the following:-

  • Accessibility

    Mutual funds units are easy to buy.

  • Liquidity

    Mutual fund unit holders can convert their units into cash on any working day. They will promptly receive the current value of their investment. Investors do not have to find a buyer; the fund buys back (redeems) the units.

  • Diversification

    By investing the pool of unit holders’ money across number of securities, a mutual fund diversifies its holdings. A diversified portfolio reduces the investors’ risk. It would be difficult for an average investor to buy varied securities to achieve the same level of diversification as is available with investment in mutual fund.

  • Professional Management

    Asset Management Company evaluates all the opportunities that arises in the market, carefully examines them and then takes decision for investing the mutual fund’s money whereas it is not an easy task for an individual and even for corporate company if investing is not their core business.

Tax credit on investment to individual

According to Section 62 of the Income Tax Ordinance, 2001, a “resident’ tax payer other than a company, is entitled to tax credit on investment in new shares offered to public by a public company listed on a stock exchange in Pakistan. This tax credit is available on the lower of (a) the amount of actual Cost of Investment (b) 20% of Taxable Income for the tax year or (c) Rs. 1 million. The tax credit availed on acquisition of such shares will be need to be paid back, if such shares are disposed off within 24 months of the date of acquisition. Units of Mutual Funds are covered under the definition of shares as per Income Tax Ordinance, 2001. In case of self employed individuals, the maximum tax credit of Rs. 220,417 is available on annual taxable income of Rs. 6 million or more at an average tax rate of 22% whereas Rs. 203,571 is the maximum tax credit available on annual taxable income of Rs. 7million or more at an average tax rate of 20%).

Self-employed Individuals:
Annual Taxable Income (Upper Limits) Average Rate of Tax [as per formula given in Section 62(2)] Gross Tax Payable [as per rates given in First Schedule] Amount of Investment eligible for tax credit Tax Credit available as per Section 62(2) Tax Saving as a % of Investment (i)
A B (%) C D = A*20% (A/B)*C
750,000 5% 35,000 150,000 7,000 4.7%
1,500,000 10% 147,500 300,000 29,500 9.8%
2,500,000 14% 347,500 500,000 69,500 13.9%
4,000,000 18% 722,500 800,000 144,500 18.1%
6,000,000 22% 1,322,500 *1,200,000 220,417 22.0%
*Note: Maximum amount of investment that is available for tax credit is restricted to Rs. 1 million.
Salaried Individuals:
Annual Taxable Income (Upper Limits) Average Rate of Tax [as per formula given in Section 62(2)] Gross Tax Payable [as per rates given in First Schedule] Amount of Investment eligible for tax credit Tax Credit available as per Section 62(2) Tax Saving as a % of Investment (i)
A B (%) C D = A*20% (A/B)*C
750,000 2% 17,500 150,000 3,500 2.3%
1,400,000 6% 82,500 280,000 16,500 5.9%
1,500,000 6% 95,000 300,000 19,000 6.3%
1,800,000 8% 140,000 360,000 28,000 7.8%
2,500,000 11% 262,500 500,000 52,500 10.5%
3,000,000 12% 362,500 600,000 72,500 12.1%
3,500,000 14% 475,000 700,000 95,000 13.6%
4,000,000 15% 600,000 800,000 120,000 15.0%
7,000,000 20% 1,425,000 *1,400,000 203,571 20.4%
*Note: Maximum amount of investment that is available for tax credit is restricted to Rs. 1 million.

For further details consult your Income Tax Advisor.