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A mutual funds is a trust that pools together the saving of a
number of investors who share a common Financial goal.
Mutual funds provide a means of diversification of investment
by small investors. Initially mutual fund collects funds from
small investors and when sufficient funds are gathered, and then
they are invested into securities of different types, thus
diversifying the portfolio. A management company manages a
mutual fund. The fund manager invests money on behalf of the
investors. The fund manager is paid a management fee. If there
is a profit or gain on investments, it belongs to the investors. In
case there is a loss, it is also borne by the investors. The money
collected is then invested in financial instruments such as shares,
debentures and other securities. Mutual funds are corporation
that accept money from investors and use this money to buy
stocks. Long term bonds, Short term debt instruments issued by
business or Govt.
Mutual funds are broadly classified into two types .
1) Based on Maturity Period:
An open ended funds is a fund that is available for subscription
and can be redeemed on a continuous basis . It is available for
subscription throughout the year and investors can buy and sell
units at prevailing NAV. In Pakistan there exist 13 open-end
mutual funds listed at Karachi Stock Exchange.
A close-ended fund is a fund that has a defined maturity period
e.g 3-6 years. These funds are open for subscription for a
Interval funds combine the features of open-ended and closeended funds. These funds may trade on stock exchanges and are
open for sale or redemption at predetermined intervals on the
2) Based on Investment Objectives:
Debt funds based on low risk and low rate of return.
It consists of Short or Long time investment.
Invested major portion depends on fixed income like
Govt.Bonds, Corporate Bonds and Fixed Deposits etc.
Balance or Hybrid funds based on Moderate Risk , Moderate
rate. It consists of Short or Long time investment.
Invested major portion depends in Mix of Equity and debt
Money market funds based on low risk, and low rate of return. It
consists of short time investment. Invested major portion
depends on instruments like Treasury Bills, Commercial papers
and Certificates of deposits etcEquity funds or Growth based on higher risk and higher rate of
return. It consists of Long time investment needed.
Invested major portion depends on Stocks of Companies.
It is the market that deals in finances. It provides a place where
capital is mobilized, offered and invested. It brings prosperity to
a country. It provides lifeblood for production and business.
Capital is made available in the form of long term Loans, owner
equity and retained earnings. Markets for financial instruments
with long term maturities of one year or more. The reason for
this name is that instruments with such long maturities are likely
to be associated directly with Funding capital investment
projects. So are long term securities issued by the U.S Treasury
and agencies of the U.S Government, State and Local municipal
securities home mortgages, commercial bank and consumer
Loan. In capital Market the participants include Financial
institutions, Public and Private companies, Foreign investors,
Ordinary retail investors from public. It exists the duration in
medium and long term securities. In capital Market investment
based in Equity shares, Prefrence shares, Bonds etc. in
Investment outlay does not require huge sum of money. Value
of security is generally low. Its Liquidity is less as compared to
money market (Long duration).
There are two types of capital market.
Primary Market (New issue market): Securities issue for the
first time. Company directly sells securities to investors (Lead to
direct capital formation). It does not include loan from financial
Secondary Market (Stock exchange): Sale and purchase of
previously issued/ second hand securities. Company does not
directly issue securities to investors. Existing investors (need of
cash) sold security to other investors (wants to buy shares of
company). They exchange securities for cash in secondary
market through intermediary (Broker).
So, Secondary market provides liquidity to securities. It leads to
indirect capital formation (Company does not get additional
capital) because securities are exchanged between investors
The capital market plays a crucial role for the development
of a country through as following functions:
Provision of Internal Loans: Capital market provides working
capital through its specialized organization and institutions. For
instance the Bankers equity limited and National Development
Finance Corporation provides long term and medium term loans
for the purchase of machinery and buildings.
Concessional Loans: Capital market provides loans on
concessional rates and easy conditions to the less developed and
backward areas of the country. For instance , Small Business
Finance Corporation and Regional Development Corporation
provide loans on concessional rates .
Loans in Foreign Currency: Capital Market also provide loans
in foreign currency to the organizations established within the
country. For instance National Finance Corporation and
Industrial Development Bank of Pakistan provide loans in
foreign exchange for the imports of technical know – how and
Provision of Equity Finance: The different banks, through the
capital market, provide capital establishing Equity Participation
Fund. For example, this fund provides funds in the less
developed area in Pakistan for the establishment and
development of the industries in these areas.
A bond is a debt security that promises to make payments
periodically for a specific period of time. Its rate of return is Fix.
A bond is a financial instrument showing the indebtedness of the
issuing body towards its holder.
The bond Market is especially important to economic activity
because it enables corporations and Governments to borrow to
finance their activities and because it is where interest rates are
determined. The bond market is larger than the equities market
in term of global investment value. It comprises: Government
bonds, issued by international agencies, Such as the World
Bank. Bonds market provides financing through the issuance of
bonds and enables the subsequent trading thereof. The bond
market also called the debt market or credit is a financial market
in which the participants are provided with the issuance and
trading of debt securities.
The Government issued these Bonds market exists in Pakistan
Market Treasury Bonds:
This bond publish in 2003, Market Treasury Bonds are given a
lot of benefits such as: Guranteed Repayment, Higher Returns,
Accepted as collateral, Liquidity, Easy process of investment.
Pakistan Invested Bond:
This bond publish in 2003, Benefits of this bonds are as follows:
Guranteed Repayment, Higher rate of returns, accepted as
collateral, Liquidity, Easy process of Investment, Investment for
medium term to long term.
Federal Investment Bonds:
This bond publish in 1994, This bond are also provide benefits
for us: Nationalization, Liquidity, Higher interest rate, Long
The Importance of Bond Market are as follows:
Central banks issued bonds to develop infrastructure of the
country, Invest to earn return, To monitor currency value, To
control money supply and subsequently, To control inflation.
The Benefits of Bonds Market are as follows:
Avenue to invest, Direct competition to banks, Money supply is
absorbed, Inflation is controlled, Foreign portfolio investment,
Improvement in Currency.
Bond Markets are classified into following Types of Bonds
Secured Bonds: Backed by assets, if company fails to pay,
Bondholder has the right to take specified assets from the issuer.
For example: Mortgage- backed up by properties.
Unsecured Bonds: are not secured by a specific assets but it
bases on higher risk and higher rate of return. In other words the
investor has the issuers promise to pay but has no claim on
Zero Coupon Bond: A bond that is issued at a deep discount to
its face value but pays no interest.
Perpetual Bonds: It is a bond with no maturity date. It may be
treated as equity not as debt. Perpetual bond are also given rate
Municipal Bonds: It is commonly known as a muni bond is a
bond issued by a local government or territory or one of their
agencies. It is generally used to finance public project such as
roads, schools, airports, seaports and infrastructure related
Term Bond: are bonds which mature or come due on a single
date. In term Bond company collect lumsum amount for the
Serial Bond: This term mature in installment at regular interval.
The stock market represents the companies that list equity shares
for public investors to buy and sell. Stock markets are one of the
control links between the financial world and the real economy.
The Stock market is also important factor in business investment
decisions, because the price of shares affects the amount of
funds that can be raised by selling newly issued stock to finance
investment spending. The stock market is a share market,
however besides shares of companies other instruments like
bonds, mutual funds and derivates contracts too are traded in the
In stock market Beginner must know eight tips for every
Start small, Diversify your portfolio, Invest in blue-chip stocks,
Never Invest in free Tips/Advice, Avoid blinding following the
crowd, Invest in what you know and understand, Invest
Regularly and continuously, Have discipline and follow your
The Stock Market serves two very important purposes. The first
is to provide capital to companies that they can use to funds and
expand their business.
The secondary purpose is the stock market serves to given
investors, those who purchase stock, the opportunity to share in
the profit of publicity-traded companies. Investors can profit
from stock buying in two ways. Some stocks pay regular
dividends, The other way investors can profit from buying
stocks is by selling their stock for a profit , if the stock price
increases from their purchase price.
There are two types of stocks :
Common Stocks: In this stocks include many features such as:
No dividends gurantee, Ownership in a company, Yielder’s
higher return than most other investment , More risky than
preferred stocks, Capital appreciation in Long term, Fluctuates
with the movement of the market voting rights.
Preferred (debt) Stocks: It has many features such as follows:
Promised Dividend, Falling somewhere in between bonds and
common stocks, It can be freely traded like and equity shares,
Less risk due to higher and more frequent dividends, No voting
Rights, This is Better for retirement or Lower risk taking people.
The main functions of stock market are as follows:
Stock market provides a platform to the investors where they
can easily purchases or sell shares or bonds.
stock market also given a Low cost to the investor that purchase
and sell of shares are done on a very nominal commission rate,
which is easily affordable to small investors.
stock market is a very reliable institute where no company can
cheat to their investors.
Stock Market also encourages small investors for the saving
because every person who saves small amount can also invest in
Islamic Finance and Products:
Islamic finance is known by different names such as Ethical
Finance, Interest-free finance, Special finance, Shariah finance,
PLS finance etc.
Islamic finance is based on the principle that the provider of
capital and the user of capital should equally share the risk of
business Ventures. It encourages sancity of contracts, sharing of
risks, prohibition of interest and speculative trading and
gambling. Islamic theories of finance encourage earnings
through participation in business activities and discourage the
avenues of unearned income.
The main Features of Islamic finance are as follows:
It takes into account the moral consequences of financial
It ensures the financial contracts are fair and equitable to all
It guarantees that financial rewards are correlated with the level
of risk and responsibility borne by all parties.
Islamic banking also play a very important role in our
.Trading and Investing
.It does not deal through interest and do not provide funds for
activities which are harmful for society such as alcohol,
gambling, tobacco, pornography, armaments etc.
Islamic Insurance (Takaful): It is close to convential concept
of mutual insurance where the participants instead of selling
their risk to a third party jointly share the burden of risk among
Principles of Islamic Finance: Islamic finance strictly complies
with sharia law. Contemporary Islamic finance is based on a
number of prohibitions that are not always illegal in the
countries where Islamic financial institutions are operating:
Paying or Charging an Interest: Islam consider lending with
interest payments as an exploitative practice that favors the
lenders at the expense of the borrower. According to sharia law,
interest is usury (riba), which is strictly prohibited.
Investing in business involved in prohibited activities:
Some activities, such as producing and selling alcohol or pork,
are prohibited in Islam. The activities are considered haram as
forbidden. Therefore, investing in such activities is likewise
Speculation: Sharia strictly prohibits any form of speculation or
gambling, which is called maisir. Thus, Islamic financial
institutions cannot be involved in contracts where the ownership
of goods depends on an uncertain event in the future.
The main features of commonly offered Islamic Finance
Deposit Products: It involves wadiah depends on no specific
returns on funds. Banks may periodically distribute rewards.
It also involves Mudaraba funds are coming led for bank’s
general use. Profits are shared between bank and customers and
losses are borne by customer only.
Financing Products: It is consists of Murabaha Product in this
customer and bank agree to banks profit amount prior to closing.
Typically fixed payment amount that included banks profit. It is
also involves Musharaka Products in Joint ownership with profit
and loss sharing based on percentage of ownership. Payments
change periodically based on share of ownership.
Istisna product also exists in financing product for future
delivery of manufactured goods at a fixed price that includes a
profit for the bank. Salam Product concept is that financing for
future delivery with amount fully paid at contract signing
typically used for agriculture.
Insurance means production against any risk.
“Insurance is a social device where by uncertain risk of
individuals may be combined in a group and thus made more
certain; small periodic contributions by the individuals
providing a fund out of which those who suffer losses may be
A single person cannot deal with all kinds of risk alone, so he
may shift the risk to a specialized group which can bear the
shifted risk at a fee. This shifting of the risk is referred to as
There are three types of Insurance.
1) Life Insurance: In this type the business relies on the law of
average. The greater the number or the lowest of the age of the
insured the smaller will be premium and vice versa.
Life insurance is further classified as
a-Ordinary / Whole Life Insurance: The insured pays the
premium throughout his life. The amount of premium varies
with age and the amount of the policy. Insurer will pay the
amount of policy when insured will die and premium will not be
paid any more after his death.
b- Term Insurance: Under it life is insured for a limited or
definite period say, 7 years, 10 years, 20 years and so on. If the
insured dies during the period the amount of the policy will be
paid to his or her beneficiary immediately and no premier will
have to be paid any more even is he dies right after playing the
first premium. If he does not die that he has to pay all the
premium and at the end of policy he will not receive any
c- Endowment Life Insurance: This is the commonest of all
other insurance policies. Its premium is highest. In this policy is
paid after death or after insurance period is complete. It can bear
with or without profit.
2) Personal Accident Insurance:
The accident may cause death or disablement. The amount is
paid depending on the conditions covered in the policy.
3) Property Accident Insurance: It has the following kinds:
a-Fire Insurance: It is a contract to compensate the insured for
loss caused by a fire during an agreed period of time and a
b- Casualty Insurance: The risk of theft, air travel and motor
vehicles etc are covered under casualty Insurance.
c- Marine Insurance / Goods in Transit: When goods moves
from one place to another risk of accident, damage, fire, theft, or
some other unforeseen incidents may take place. Marine
insurance provides them the coverage of such risks.
Following are the importance issues of insurance:
.Insured may acquire loan by pledging the insurance policy as
.For the payment of installments of premium of the insurance
people save in this way people habitual of forced savings.
.In case of joint life insurance, after death of any one of the
partners his insured amount will be available to the reaming
partners in this way they could pay the capital of the died partner
without withdrawing capital from the business.
.Through marine insurance high seas risks and goods on the
board are covered.
.The risk of accident, theft, health, motor vehicles are covered
under Casualty insurance.
.Fire insurance is a contract to indemnify the insured for the loss
or damage to property caused by fire during an agreed period an
agreed period of time period of time and a specified amount.
Fractional Reserve Banking:
Only a fraction of the money is on hand and available for
withdraw. They allow more money to be lent at any given time.
This process produces Liquidity.
Fractional reserve banking is a system that allows banks to keep
only a portion of customer deposits on hand while lending out
the rest. This system allows more money to circulate in the
economy. Critics of the system say it creates the danger of a
bank run, where there is not enough money to meet withdraw
requests. The fractional reserve reduced required reserves to
zero on March 26, 2020. The banks keep fraction of their assets
with the system as reserve. This system of fractional reserve
permit banks to extend their loan giving limit. This eventually
helps in increasing money supply in the economy.
Fractional reserve banking system in which the goldsmith’s
reserves amounted to just a fraction of total deposits. The
reserve ratio measures reserves as a share of total claims against
the goldsmith, or total deposits.
For example, if the goldsmith had gold reserves value at $5,000
but deposits totaling $10,000 the reserve ratio would be 50%.
Fractional reserve banking has its benefits, including freer
availability of credit and the ability for banks to reap additional
money for their reserves. At least theoretically, these additional
revenues will be seen by the customer in the form of interest on
their bank deposits. The main benefits of fractional reserve
banking to an economy as whole, is the velocity of money. In
other words this system helps keep money moving from one
individual or entity to another. The movement of money is
needed for a healthy and robust economy.
With fractional reserve banking, the banking system creates
money and lends it out. It has only a fraction of liabilities on
reserve. It cannot satisfy customer’s demands if all wants to
withdraw deposits at once. The main source of bank panics is
that News that loans are not likely to be paid back, customer will
make a run on the bank so in this case that happen Droughts and
Stock market crash.
Following are the important points of fractional reserve
.Adopting such a system is necessary for the survival of the
.Such a banking system creates only money and does not make
people richer directly.
.In most of the countries, the percentage of deposits that the
banks need to keep as reserves is dictated by the government or
the central bank.
Transmission Mechanism of Monetary
Monetary policy is an important tool to achieve macroeconomic
goals. It is made by the Central Bank of a country. This is a
relationship between the amount of money in the economy (the
money supply and the level of business activity. If the money
supply increases, consumer spending will increase, promoting
growth. If the money supply decreases, the economy is likely to
contract. The conducting of monetary policy is very necessary
because money can affect many economics variable that are
important to the wellbeing of our economy, politicians and
policy maker throughout the world care about the conduct of
monetary policy, The management of money and interest rates.
The organization responsible for the conduct of a nation’s
monetary policy is the Central Bank. The United State central
bank is the Federal Reserve System.
Monetary policy to promote effectively the goals of maximum
employments, Stable prices and moderate long term interest rate.
In the light of the definition of monetary policy, its aims and
objectives can be given as under.
.Achievement of goal of economic development is next to
impossible without the stable money market. Therefore, the
basic objectives of the monetary policy should to be the stability
of money market.
.For establishing the positive trend in industry, commerce and
employment, the oscillations in the prices can be controlled
through the monetary policy.
.The monetary policy makes the supply of money stable and
thereby the foreign trend becomes strong.
.Inflation and deflation both are the extra ordinary situations
therefore the aim of the monetary policy is to control both of
.To eliminate the injurious effect from the investment
environment, which is possible only by the stable rate of
.Unemployment is a serious economic problem therefore the
monetary policy should be used for achieving the full
Monetary policy play an important role in Economic
Monetary refers to the policy of the monetary authority of a
country with regard to monetary matters. It may be defined as
that policy which deals with:
a)The controls of financial institutions;
b)Active purchases and sales of paper assets by the monetary
authority as a deliberate attempt to effect changes in money
c)Passive purchases and sales of paper assets resulting from the
maintenance of a particular interest rates structure, the stability
of security prices or meeting other obligations and
Development of banking facilities and savings institutions,
reorganization of agricultural and industrial credit, Integration
and improvement of the money market, growth of a sound
central banking, closing of free markets in gold and silver
replacement of hoards and above all currency reforms are
urgently needed. It is only after these deficiencies are made
good that the monetary apparatus of economically backward
countries can prove effective in aiding construction and
development. If a country fails in this task it would either go
slow even stagnate be compelled to switch over its economic
system to overall planning and reallocation of resources through
direct state control.
Determinants of Aggregate Demand
and Aggregate Supply:
According to Keynesian theory, in the short-run the level of
national income is determined by aggregate demand and
aggregate supply forces.
Aggregate Demand (AD), Y=C+I
It consists of total demand for goods and services. In other
words, Aggregate demand is national income which has been
earned by the factors of production against rendering of their
services. Such earnings will be spent by them on consumption
goods and no investment goods. Thus, on the one side,
Aggregate demand represents total income earned, while on the
other side, Aggregate demand composes of total expenditures of
the economy. Along with increase in national income, the
aggregate demand or aggregate expenditures for C and I go on
to increase. It is shown in the figure below.
Aggregate Supply (AS), Y=C=S
It consists of total output produced in the economy. In other
words, Aggregate supply is national income which has been
produced by the factors of production. When the factors of
production produce the goods and services they get payment
against their services.
A part of such earnings will be spent by the earners on
consumption goods and a part will be saved. Thus, on the one
side, aggregate supply represents total goods and services
produced while, on the other side, It consists of total factor
payments. Along with increase in output of the economy, the
factor payments also increase. It is shown in the figure below.
.Aggregate Demand is the money value of the total demand for
goods and services in an economy during a given period.
.Aggregate supply is the money value of the total output of
goods and services available for purchase by an economy during
a given period.
.The components of aggregate demand are private consumption
expenditure, private investment expenditure, government
expenditure and net exports.
.The components of aggregate supply are consumption
expenditure and savings.
.Aggregate demand curve originates from Y-axis.
.Aggregate Supply curve originates from X-axis.
History of Money and Banking:
Any item that people are generally willing to accept in exchange
for goods, services and financial assets such as stock or bonds is
money. Many of us naturally think of money as coins or dollars
bills. Money performs four keys functions. It is a medium
exchange, store of value, a unit of account and a standard of
The history of money was mainly through:
Commodity Money: In the earliest period of human civilization
and commodity that was generally demanded and chosen by
common consent was used as money. Goods like furs, salt, rice,
wheat, utensils, weapons etc were commonly used as money;
such exchange of goods was known as ‘Barter Exchange’.
Metallic Money: Metals like gold, silver, copper etc were used
as they could be easily handled and their quantity can be easily
ascertained. It was the main form of money throughout the
major portion of recorded history.
Paper Money: It was found inconvenient as well as dangerous
to carry gold and silver coins from place to place, so invention
of paper money marked a very important stage in the
development of money. At present a very large part of money
consists mainly of currency notes or paper money issued by the
Credit Money: People keep a part of their cash as deposits with
banks, which they can withdraw at their convenience through
cheques. The cheque (known as credit money or bank money)
itself is not money, but it performs the some functions as money.
Plastic Money: The latest type of money is plastic money in the
form of credit cards and debit cards. They aim at removing the
need for carrying cash to make transactions.
Banks are financial institutions that accept deposits and make
loans. It included under the term banks are firms such as
commercial bank, saving and loans association, mutual saving
banks and credit unions. A person who needs a loan to buy a
house or a car usually obtain it form a local banks because banks
are the largest financial intermediaries in our economy.
on January 1,1974 the Government of Pakistan Nationalize all
the Pakistani scheduled banks including state bank of Pakistan,
Industrial bank of Pakistan, Agricultural Development Bank of
Pakistan through the bank-nationalization act,1974 to achieve
the desired objectives. The weaker commercial banks were
merged with stronger ones and in all five major banking
companies were formed.
Banking has been around in one form or another throughout
recorded history, as issuers of currency and as store of wealth.
Even before currency emerged, starting with the first minted
coins, and then adding what were known as banknotes, paper
currency, banks still were around to manage the accumulation of