KSE MEEZAN 30/100 INDEX

SUBMITTED BY:
IQRA RAZZAQ
BUSHRA ZAFFAR
SAIMA SALEEM

MSI14MBA010
MSI14MBA008
MSI14MBA012

KSE Meezan Index 30/100

Overview:
KMIF is a tool for enabling investors to seek exposure to the KMI-30 index stocks in the
same proportion as in index. KMIF is suited for those investors who are looking for a passive
investment strategy that provides a low-cost investment solution to get exposure to a
diversified basket of Shariah compliant stocks.

Key Points

Pakistans only tracker Fund - KMIF, which tracks Pakistans only Shariah Compliant
Index, the KMI 30 An Industry First

The KMI 30 Index has outperformed KSE 100 every year since its launch in 2009

A one-stop solution for putting your money into every single company of the KMI 30
Index

Passive investment philosophy, hence low operating expenses compared to activity

managed funds, and little potential for underperformance (relative to benchmark)

No Lock-in Period - Invest Today, En-cash whenever you like1

Avail Tax Credits as per prevailing Tax Rules

No Ceiling on Investment

KSE MEEZAN INDEX FUND (KMIF) FUND FACTS

The KMIF is a tool for enabling investors to seek exposure to the KMI 30 index stocks in the
same proportion as found in the index.
Quick Facts
Fund Launch Date

May 23,2012

Management Fee

1%

Fund Type

Open-end Index
Tracker

Front-end Load

2%

Fund Category

Equity

Back-end Load

NIL

Bench Mark

30%

Minimun Investment

Initial Rs.5000/- and

Rs.1000/- thereafter

What is KMI 30 Index?

KMI 30 Index is a compilation of top 30 Shariah Compliant Publically Listed Companies in

the Karachi Stock Exchange (KSE), and is designed to represent the performance of these
companies. KMI 30 Index has outperformed KSE 100 every year since its launch in 2009

Fund Objective
KMIF aims to mimic the performance of the KMI 30 Shariah index using passive investment
strategies with the objective to provide investors returns that are closely aligned with the
returns of the tracked / benchmarked index.

How does the fund Works?

The fund invests in stocks of companies included in the KMI 30 Index. In line with the
objective, the fund will invest in the following pattern:

A minimum of 85% of its average net assets in stocks comprised in the KMI-30 Index

A maximum of 15% of its average net assets in cash or cash equivalent instruments

Why Choose KMIF?

The fund invests in stocks of companies included in the KMI 30 Index. In line with the
objective, the fund will invest in the following pattern:

You will be putting your money into every single company tracked by KMI 30, and
your investment will be closely aligned with the returns each year of the KMI 30
Index

Passive investment style relative to actively managed funds; therefore low-cost and
little potential for underperformance

No lock-in Period, No Exit Load; Invest Today, En-cash in a maximum of 6 working

days

Suitable For:
Investors who are looking for alternate or additional investment opportunities that provide
them with a low-cost way to gain equity exposure
Investors who prefer passive investment philosophy and do not want to be dependent on
security selection and sector allocation by Fund Manager.

Islamic Mutual Funds:

Shariah Guidelines & Modus Operandi
Difference between Conventional & Islamic Mutual Funds

Presence and careful monitoring by the Shariah Board

It is ensured that all aspects of the Shariah are adhered to before,

during and after an investment is carried out in a Shariah Compliant manner

Well defined and Specific Investment Avenues

Investment avenues are limited to those that comply with the Shariah

Charity and Purification

-

Any investment/financing that is deemed to have an element of Riba becomes liable

for Purification and has to be given away as charity

Asset Ownership
-

The ownership of an asset lies with the party that provides financing and bears the
risk e.g. financing by a bank, and assumption of all the risk (non recovery, etc)
associated with it.

Permissible transactions
-

Transactions have to be conducted according to the Shariah, e.g. no short sales

Islamic Investment in only Shariah Compliant Avenues

-

For Islamic mutual funds and other Islamic Investors, investment can only be made in
those securities (equity, debt, etc) which comply with well-defined screening ratios

Shariah Screening for Equity :

Shariah compliance of stocks is done under the guidance of qualified and reputed
Shariah experts. For stocks to be Shariah compliant, it must meet ALL the six key
tests given below:
1.

Business of the Investee Company

Core business of the company must be halal and in line with the dictates of Shariah.
Hence, investment in securities of any company dealing in conventional banking,
conventional insurance, alcoholic drinks, tobacco, pork production, arms
manufacturing, pornography or related activities is not permissible.

2.

Debt to Asset ratio should be less than 37%. Debt, in this case, is classified as any
interest bearing debts. Zero coupon bonds and preference shares are, both, by
definition, part of debt.

3.

The ratio of non-compliant investments to total assets should be less than 33%.
Investment in any non-compliant security shall be included for the calculation of this
ratio.

Debt to Total Assets

Non-compliant Investments to Total Assets

4.
Non-complaint Income to Total revenue Purification of Non-compliant
income
-

The ratio of non compliant income to total revenue should be less than 5%. Total
revenue includes Gross revenue plus any other income earned by the company. This
amount is cleansed out as charity as a pro rata ratio of dividends issued by the
company.

5.
-

The ratio of illiquid assets to total assets should be at least 20%. Illiquid asset, here, is
defined as any asset that that Shariah permits to be traded at value other than the par.
6.

Illiquid Assets to Total Assets

Net Liquid Assets to Share Price

The market price per share should be greater than the net liquid assets per share
calculated as: (Total Assets Illiquid Assets Total Liabilities) divided by number of
shares

Trading Guidelines & Ready Buy Deferred Transactions

Trading Guidelines
1. Same day purchase and selling of the same scrip is prohibited
2. Shares should not be sold before settlement i.e. their possession has been transferred
to the fund/owner
3. Blank sale or short sale is not allowed
Ready Buy Deferred Sale Transactions
Same day trading and forward sale transaction of shares as practiced in stock market is not
allowed in Shariah. However as an alternative, following procedure may be adopted.
1. Day 1: Fund buys shares from stock market via broker. On the same day the broker
enters into a unilateral promise to purchase these shares from Fund at the future date.
(The broker will act as end buyer/Principal)
2. The format for unilateral promise to purchase will clearly state that this document
represents only unilateral promise to purchase shares from bank and actual sale
transaction may take place on future promised day.
3. Day 3: Fund receives the share in its CDC account as per settlement schedule of the
stock market. (T+1)
4. Day X (Transaction Date):On the agreed day the actual sale transaction of the share
take place between the fund and the broker and will be recorded with the help of sale
advice issued by Fund.
5. Settlement Date: Fund would transfer the shares directly into brokers CDC account
and will receive the payment from the broker against the shares sold.

Islamic Financial Industry in Pakistan:

Total Islamic Banks Deposits currently stand at Rs. 448.5 billion, which has grown
from Rs. 147 billion in 2007, representing a growth of 205.1%.

Meezan Bank is the pioneer in the Islamic Banking sector in Pakistan which started its
operations in 2002. In 2012, its deposit base stands at Rs. 175 billion, which is 38% of
the Islamic Banking sector in Pakistan.

Total size of Islamic Assets have shown a significant increase

The total value of issued Ijarah stood at Rs. 333 billion at the end of March 2012.

Total number of Islamic institutions has increased over the years

Number of Islamic banks stood at 5 while number of Islamic windows of

Conventional Banks stood at 12 at the end of March 2012

Islamic asset management is one of the fastest growing sectors within the Islamic
finance industry today

The growth in AUM of Islamic Funds is commendable, witnessing a surge from PKR
14Bn in FY 07 to PKR 39Bn FY11, which translates into a CAGR of 29%.

Inclination towards Islamic Mutual Funds is on the rise

Interestingly total AUMs for the entire Pakistani Mutual Fund Industry, since FY07
have remained flat, while AUMs for Islamic Funds have increased and that for
Conventional Funds have decreased. Thereby indicating that investors are switching
from conventional funds to Islamic funds.

Major room for growth in Islamic Fund evident

FY11 reveals Islamic Funds constitute only 15% of the total Mutual Fund Industry,
which is a total pie of PKR 334 Bn. The low size indicates a massive untapped
potential and possible growth in this area

Al Meezan Investments is the biggest and the only full fledged Islamic AMC with
Funds base of Rs. 39 billion which constitute 76% of the Islamic Mutual Fund
Industry.

Mutual Funds Growth in AUMs Past 5 Years

Sovereign Fund Growth in AUMs Past 5 Years

KSE-Meezan Index 30 (KMI 30)

KMI-30 Technical Screening Filters
In addition to the Shariah screening filters, the following filters are applied on stocks for them
to be eligible for the KMI-30 index.
Screening Criteria # 1:

The Company which is on the Defaulters Counter and/or its trading is suspended,
declared Non-Tradable (i.e. NT) in preceding 6 months from the date of recomposition shall NOT be considered for inclusion in KMI-30 Index

Screening Criteria # 2:

The Company will be eligible for KMI-30 Index if its securities are available in the
Central Depository System

Screening Criteria # 3

The Company should have a formal listing history of at least two months on KSE

Screening Criteria # 4

The company must have an operational track record of at least one financial year

Screening Criteria # 5

The Company should have minimum free-float shares of 5% of total outstanding

shares

Screening Criteria # 6

The Company will be eligible for KMI-30 Index if its securities are traded for 75% of
the total trading days

Screening Criteria # 7
Mutual Funds (both Open-Ended and Closed-Ended) are ineligible for inclusion in the KMI30 Index

KMI-30 Selection:

From the list of Shariah compliant companies, securities are selected on the basis of
Free Float and Impact Cost.

While ranking the companies 50% weight is assigned to Free Float capitalization and
the remaining 50% is allocated to Impact Cost, such that the companies with the
Islamic Index highest Free Float and the lowest Impact Cost get the highest rank in
the selection process.

Top 30 ranked companies as per above criteria are included in Islamic Index.

Shariah Compliant Stocks:

Shariah Compliant Stocks:

Al Meezan Investments receives a list of eligible stocks from KSE. Usually this list
comprises of over 200 stocks and constituting over 90% of the entire market
capitalization.

This list is screened on Shariah filters and around 100 companies (as of last screening)
remain as Shariah Compliant companies. These companies based on the last screening
comprised of approximately 56% of the total market capitalization.

Out of the above list, the top 30 stocks based on the methodology discussed are
derived. As of the last screening, this list comprised of approximately 50% of the
total market capitalization.

KSE Meezan 30 Index vs KSE 100 Index

KARACHI: Five companies have replaced an equal number of constituents of the

Karachi Stock Exchange (KSE) Meezan 30 Index (KMI-30) after the KSE management
recomposed Pakistans only index of Shariah-compliant stocks on Monday.

According to a notice on the KSE website, the five new companies in KMI-30 are Fauji
Cement, Attock Petroleum, Sui Northern Gas Pipelines, Pakgen Power and NetSol
Technologies. The outgoing five are Attock Cement, Abbott Laboratories, Pak Suzuki, ICI
Pakistan and Indus Motor Company.
Out of the KSE-100 Index, KSE All-Share Index, KSE-30 Index, KMI-30, BK TI and OG TI,
only KMI-30 tracks the performance of Shariah-compliant stocks based on the free-float
market capitalisation methodology.

The KSE management has recomposed the index based on a review period of January 1 to
June 30. The index is revised on a semi-annual basis.
The screened list of Shariah-compliant securities is provided by Al Meezan Investment
Management Limited, an asset management company, whose research analysts review each
companys financial reports frequently to ensure that they meet all the relevant benchmarks.
Despite repeated attempts, no one from the KSE or Al Meezan Investment Management was
available for comments on the reasons for the removal of the five companies from KMI-30.
For any stock to be Shariah compliant, it must meet six broad criteria. First and foremost, the
core business of the company should not violate any principles of Shariah. Also, interestbearing debt in relation to total assets of the company must be less than 37% for it to be
called Shariah compliant.
Non-compliant investments in relation to total assets must be less than 33%. Similarly, noncompliant income in relation to total revenue must be less than 5%, illiquid assets in relation
to total assets must be greater than 5% and the market price per share should be equal to or
greater than net liquid assets per share for a company to become Shariah compliant.

KSE Meezan Index (KMI-30) - Stellar Performance

the previous decade saw tremendous rise in the acceptability and growth of Islamic financial
products in Pakistan. Deposits of Islamic Banks grew from an insignificant amount in 2002 to
over Rs 400 billion in mid 2011, representing 8% market share of the entire deposits in
banks. With the development of the financial markets in the country, there was a need felt for
new investment products to facilitate the growth and promotion of savings.
Mutual Funds industry has played an active role in providing new investment alternatives.
Presently, the Mutual Funds industry stands at Rs 333 billion, in which the size of Islamic
Funds is Rs 45 billion. The market share of Islamic mutual funds has shown incredible
growth over the period and has increased to 14% from 7.54% in mid 2008, also illustrated in
the
Figure
below:

Need for an Islamic benchmark:

The index helps Shari'ah conscious investors to identify the Halal equity investments. With
the rapid growth and acceptance of Islamic products in the market, a void was created for a
benchmark that can accurately compare the performance of Islamic equity funds. As a result,
KSE-Meezan Index (KMI-30) was established by the collaboration between Al Meezan
Investment Management Ltd (Al Meezan) and the Karachi Stock Exchange (KSE) in 2008.
Al Meezan, in consultation with Shari'ah Department of Meezan Bank, provides Shari'ah
expertise, guidelines, skills and stocks screening towards the activities pertaining the recomposition of the Index; whereas, KSE provides maintenance and dissemination support for
the index.
The index helps Shari'ah conscious investors to identify the Halal equity investments. It also
provides them with a suitable benchmark to compare the performance of their investments.
Besides tracking the performance of Shari'ah compliant equities, its construction aimed to
increase trust of Shari'ah conscious investors and enhance their participation.
The following table lists the Islamic Equity Funds in Pakistan, all of which use the KMI-30
Index as a benchmark. In addition, it is also used by five Islamic Balanced Funds and Islamic
Asset Allocation Funds for benchmarking.
-- We attempt to evaluate the performance of the KMI-30 Index against the other indices on
Karachi Stock Exchange since its launch in 2008. Some interesting facts emerge through this
exercise:
Since inception, the KMI-30 index has provided a return of 41% to its investors. During the
same period, KSE-100 (which tracks the performance of the top 100 market capitalised
companies) and KSE-30 (which tracks the performance of the top 30 most liquid stocks based
on free float methodology) both underperformed considerably; and, in fact, provided negative
returns.

The time when KMI-30 Index was launched concurred with a financial crisis that swept the
global markets, which also affected Pakistan's Capital Market. Despite these setbacks, the
KMI-30 has been able to outperform KSE-100 and KSE-30 by 42% and 60% respectively.

Let us illustrate this with an example. We take three hypothetical passive investors, each of
whom invested a capital of Rs 1,000 in the stock market at the start of the FY'08. They chose
to invest differently however. Investor A invested in the KMI-30 index, while B and C
invested in KSE-100 and KSE-30 respectively.
Investor A's investment has grown to Rs 1,413.57 yielding 41%. Investor B's portfolio was
worth Rs 991.97 (a loss of 1%) and investor C lost 19% of his investment, which was worth
Rs 806.93. It can be inferred from the same example that once recovery began in the market,
KMI-30 index outperformed the KSE-100 and KSE-30 indices over the entire period. At
times, the gap widened substantially.

DEFINITION of 'Dow Jones:

Industrial Average - DJIA' The Dow Jones Industrial Average is a price-weighted average of 30
significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented
by Charles Dow back in 1896.

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