Pakistan's mutual fund industry has expanded nearly 6.8 times since 2019, crossing Rs4 trillion in assets under management (AUM) by late 2025. However, the sector's heavy concentration in low?risk money market instruments is raising concerns about market depth, investor behaviour and systemic liquidity pressures.

According to a post by the Overseas Investors Chamber of Commerce and Industry (OICCI) on X, almost half of the industry's total AUM is parked in money market instruments, while only 14% is allocated to equities. This underscores investors' overwhelming preference for liquidity and fixed?income products over long?term stock market exposure.

"The total liquidity mutual funds have under management is close to Rs4 trillion, which was the last reported number from late 2025," said Sana Tawfiq, Research Head at Arif Habib Limited (AHL). "Out of that, if we calculate 14% of Rs4 trillion, only that portion is invested in equity, while the rest is parked in the money market, including T?bills, long?term bonds and similar instruments."

The chamber noted that such concentration has broader implications for Pakistan's already shallow capital market, particularly the Pakistan Stock Exchange (PSX), where periods of panic selling can amplify volatility.

Between December 2024 and June 2025, the mutual fund industry witnessed an overall decline of Rs384 billion in AUM as investors exited funds simultaneously amid heightened uncertainty and market volatility. During the same period, HBL Asset Management reportedly lost 23% of its AUM within six months.

Market experts said the withdrawals were not necessarily linked to weak fund performance, but rather reflected investor anxiety and the tendency to seek liquidity during uncertain periods, particularly during geopolitical tensions and market corrections, according to Muhammad Shahroz of Insight Securities.

Tawfiq added that the Rs384 billion declinein industry AUM between December 2024 and June 2025 highlighted the scale of investor withdrawals during periods of uncertainty.

Commenting on the broader investment pattern, Shahroz said most mutual fund investors in Pakistan remain highly risk?averse and prefer fixed?income products over stocks."Most people who open an account in mutual funds do not prefer risky assets like stocks. They usually ask fund managers to invest their money in T?bills, PIBs or Sukuk instead of the equity market."

The OICCI highlighted that when investors redeem units in large numbers, fund managers are forced to rapidly liquidate holdings to meet cash requirements. The associated transaction costs are then absorbed collectively by all unitholders, including long?term investors who remain invested.

To address this issue, the Securities and Exchange Commission of Pakistan (SECP) floated a swing pricing proposal for consultation in April 2026. The mechanism seeks to ensure that redemption?related transaction costs are borne primarily by investors exiting the fund rather than being distributed across the entire investor base.

Swing pricing is already an established practice in several developed markets, including the European Union, the United Kingdom and parts of Asia, where regulators use it to reduce dilution risks and discourage panic?driven withdrawals.

Under the proposed framework, the redemption price of a fund would be adjusted during periods of significant outflows, effectively passing on the cost of liquidation to redeeming investors.

The OICCI said three implementation decisions would be critical for the effectiveness of the proposal in Pakistan. These include calibrating redemption thresholds according to fund categories instead of applying a blanket industry?wide benchmark; introducing carve?outs for retail investors investing through systematic investment plans; and requiring fund managers to disclose the applied swing factor at the point of transaction confirmation instead of waiting for monthly disclosures.

Shahroz noted that episodes of geopolitical tension, including the recent conflict involving Iran, often trigger panic?driven redemptions from mutual funds."When such events happen and the stock market declines, funds experience redemptions. To meet those withdrawals, fund managers sell their holdings, and there is a transaction cost attached to that process," he explained."If a fund has 100 investors and only 10 investors panic and redeem their money, the cost associated with those redemptions is effectively borne by all investors."

He said the SECP's proposed swing pricing framework attempts to address this imbalance by ensuring that redemption?related costs are charged specifically to the investors initiating withdrawals rather than long?term investors who remain invested in the fund. The proposal could strengthen investor confidence and improve fairness within the mutual fund industry, particularly during periods of market stress, although its success will depend on implementation clarity and investor awareness.