Choosing Between Two Shariah-Compliant Equity Funds
A client has PKR 5 million to invest for at least three years and wants Shariah-compliant Pakistani equity exposure. Her bank relationship manager offers two funds. Fund A: NAV PKR 112.45, front-end load 3%, annual expense ratio 2.1%, cash 4% of assets. Fund B: NAV PKR 98.20, no front-end load, annual expense ratio 3.4%, cash 12% of assets, and a 1% redemption fee if redeemed within six months. Both are approved by SECP; Fund B has a shorter track record and a concentrated portfolio of 18 stocks. The client notices Fund B’s lower NAV and believes it is “cheaper”. She plans to invest now and may need liquidity in 30 months. She asks you to compare the two on a like-for-like basis and recommend one, or a split.
1. Calculate units purchased and effective equity exposure for each fund on a PKR 5 million investment. Explain why NAV per unit is not a valuation signal.
Read the worked answer
Fund A: the load is 3% of PKR 5m = PKR 150,000, so PKR 4.85m is invested. Units = 4,850,000 / 112.45 = 43,130 units (approximately). Equity exposure = 4.85m × 96% = PKR 4.656m.
Fund B: no front-end load, so PKR 5m is invested. Units = 5,000,000 / 98.20 = 50,916 units. Equity exposure = 5m × 88% = PKR 4.40m.
NAV per unit is not a price/cheapness signal. A lower NAV may simply reflect a different launch date, share split, or accumulated distributions. The investor owns a proportional claim on the fund’s assets; what matters is the portfolio, costs, risk, and total return. Fund B’s lower NAV does not mean better value, and its 12% cash holding reduces equity participation.
2. Compare all-in costs over a three-year holding period and advise on selection, including the liquidity need at 30 months.
Read the worked answer
Fund A’s one-time load is PKR 150,000. Its annual expense ratio is 2.1%, versus 3.4% for Fund B, a difference of 1.3% of assets per year, or about PKR 65,000 on PKR 5m. Over three years that is roughly PKR 195,000, so Fund B’s higher annual cost exceeds Fund A’s load by about PKR 45,000 before returns. Fund A also gives higher equity exposure: PKR 4.656m versus PKR 4.40m, a difference of PKR 256,000. If equities return 10%, that extra exposure adds about PKR 25,600 per year, though it also adds downside.
Fund B’s redemption fee is irrelevant at 30 months. Fund B’s 12% cash and 18-stock concentration may suit a cautious investor but are not a cost advantage. Recommendation: Fund A for a three-year equity allocation if the client accepts volatility; a split only if she wants lower equity risk or manager diversification. The 30-month liquidity need is compatible with either fund, but she should not rely on equity fund redemption proceeds for a fixed obligation without a cash buffer.