KARACHI - After showing a significant growth of 53 per cent in terms of asset size during the last 5 years, the mutual fund industry faced hard times during FY09. With the slowdown in the economy and liquidity crunch in the market, the overall industry experienced a declining trend since Jun-08, decreasing 40 percent from a level of Rs337b to close at Rs204b in Jun-09. The open-ended and closed-end funds having different categories declined by 40 percent and 39 percent during FY09 to close at Rs176b and Rs28b respectively. The industry touched the lowest level of Rs174b in Jan-09, however, it recovered from this level, increasing by 17 percent during the last 5-month period of FY09. On MoM basis, the industry showed a decrease of 1.1 percent during Jun-09. The Income and money market funds category contributing around 46 percent to the total open-ended mutual fund industry had been enjoying substantial growth for the last 5 years. However, during FY09, amid liquidity crunch in the market, the income and money market funds category reached Rs79b, showing a decline of 44 percent from Jun-08 figure of Rs140b. The withdrawal of money from income and money market funds started after Nov-08 when the SECP took the step to revise downward the prices of the TFCs thus, discounted the NAVs. During FY09, the income and money market funds earned negative average annualised return of 4.7 percent, with the Pakistan Income Enhancement Fund (PIEF) earning the highest annualised return of 18.6 percent. The fund was launched in Aug-08, followed by ABL Income Fund (ABL-IF) (launched in Sep-08) earning an annualised return of 14.6 percent. The worst performers during FY09 were Reliance Income Fund (RIF), Dawood Money Market Fund (DMMF) and AKD Income Fund (AKDIF) posting annualised return of -35.0 percent, -19.4 percent and -12.1 percent respectively. The market expectation of decline in inflation rate is based on the high base-effect and lower food and core inflation. Besides these factors liquidity is expected to improve, subject to foreign inflows from IFIs and FoDP, which should put a downward pressure on the interest rates. The market participants are expecting a discount rate cut in the upcoming monetary policy by 100-150 basis points. In June 2009, asset allocation of the Income and money market funds category depicts that the fund managers of the fixed-income funds are now looking for the long term papers and increased their exposure in the govt securities. Assuming the declining interest rates scenario, we expect better returns of fixed income funds on the basis of improving their asset prices, stated Mazhar Sabir of InvestCap Research. It is important to note that when KSE 100-index touched the highest level of 15,676 in Apr-08, the equity funds categorys fund size stood at Rs121b. The equity funds category reached at Rs61b in Jun-09, showing a severe decline of 41 percent from Jun-08 figure of Rs104b. The KSE 100-index tumbled down by 54 percent from its peak level to close at 7,162, whereas during FY09, the KSE 100-index decline by 41.7 percent. However, after the arrangement of fund i.e. NIT-SEF managed by NIT, a recovery is seen from Jan-09 onward; the KSE increased by 22 percent from Dec-08 level of 5,865. Meanwhile the equity funds category fund size decreased by 8 percent during the same period under review. During FY09, three open-ended equity funds were launched in the month of Jul-08, Sep-08 and Oct-08 namely; IGI Stock Fund, Alfalah GHP Alpha Fund and Pak Oman Advantage Stock Fund with a seed capital of Rs100 million each. During FY09, Alfalah GHP Alpha Fund (AGAF) and IGI Stock Fund (IGISF) earned a highest return in the equity funds category which is 39.3 percent and 32.9 percent from their inception date i.e. 5-Sep-08 & 15-Jul-08 respectively whereas full year least negative return earned by HBL-Stock Fund was 17.8 percent as against its benchmark negative return of 41.7 percent. NAFA Stock Fund (NSF), Crosby Dragon Fund (CDF), and National Investment Trust (NIT) were the most troubled funds in terms of returns and gave negative returns of 45.6 percent, 42.2 percent and 41.5pc respectively.