KARACHI: Pakistan’s mutual fund industry has witnessed a sharp expansion over the past three years, with assets under management (AUM) tripling amid strong domestic inflows, rising capital market valuations and a gradual shift by investors from fixed-income products towards equities.
Data compiled from the Mutual Funds Association of Pakistan (MUFAP) shows that total AUM recorded an 11% year-on-year increase in December 2025, reflecting the growing importance of local institutional investors in supporting the country’s capital markets. The rapid growth in mutual fund assets has coincided with a sustained rally in equities and improving macroeconomic stability.
According to JS Research, the expansion of the mutual fund industry has played a key role in enabling the equity market to absorb persistent foreign portfolio outflows while supporting a broad-based re-rating of valuations. Over the three-year period from 2022 to 2025, the benchmark KSE-100 Index delivered a cumulative return of 331%, a performance analysts partly attributed to strong participation by mutual funds and individual investors.
Within total AUM, equity-oriented investments have expanded at a significantly faster pace than debt. During calendar year 2025, investments in equity portfolios rose by 56%, while allocations to debt portfolios, including income, fixed-income and money market funds, increased by only 5%. As a result, equity’s share in total mutual fund AUM climbed to 15% in December 2025, up from around 10% in December 2023.
This change reflects shifting relative returns across asset classes. A sharp easing in monetary conditions has reduced the appeal of fixed-income instruments. Since December 2023, the policy rate has been cut cumulatively by 1,150 basis points, while yields on three-year Pakistan Investment Bonds have declined by about 630 basis points. In addition, the latest federal budget increased taxes on fixed-income investments, further encouraging investors to tilt towards equities.
Despite the recent rise, analysts note that equity exposure within mutual funds remains well below historical highs. During the 2016–18 period, equities accounted for between 40% and 50% of total AUM, compared with the current level of 15%. This gap indicates potential for further reallocation towards equities if macroeconomic conditions remain stable and corporate earnings continue to improve.
The growing pool of domestic liquidity has also helped stabilise the market during periods of foreign selling. In calendar year 2025, foreign portfolio investors recorded net outflows of approximately $370 million. These outflows were more than offset by combined net buying of around $561 million by mutual funds and individual investors, with mutual funds alone accounting for net equity purchases of about $298 million.
This pattern has continued into early 2026. Year-to-date figures show foreign investors remaining net sellers, with outflows of roughly $53 million, while mutual funds posted net inflows of around $92.5 million. Analysts view this as evidence of a structural shift in market dynamics, with domestic institutions increasingly acting as the primary buffer against external volatility.
Ample domestic liquidity has also supported a sustained improvement in market valuations. The price-to-earnings multiple of the JS Research universe rose from about 3.5 times in December 2023 to nearly 8 times by December 2025. While valuations have already re-rated, analysts believe further upside remains possible if earnings growth holds and macroeconomic risks continue to ease.
Market participants see the expansion of the mutual fund industry as a positive structural development for Pakistan’s capital markets. A deeper domestic investor base reduces reliance on volatile foreign flows and strengthens market depth and price discovery. The tripling of mutual fund AUM over the past three years underscores a significant transformation in Pakistan’s investment landscape, with domestic savings increasingly channelled into capital markets and equities gaining prominence within managed portfolios.
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