Of the nearly 200 million people who live in Pakistan, just over 200,000 have either a brokerage account or investments in a mutual fund. That is a staggeringly low percentage even by the standards of a developing country. Why? Because the overwhelming majority of Pakistanis do not know what a mutual fund is, let alone how to invest in one. But judging by the flood of e-mails in my inbox, a very large number of people are very interested in learning.

This article will lay out how one can begin investing in a mutual fund. First, let us cover some basics. In my previous two articles, I have explained why investing in stocks is a good idea, and how to think about the general concept of investing in stocks. However, in order to be habitually good at investing in stocks, one needs at least an elementary knowledge of accounting, finance, economics and mathematics. Not everyone has that kind of training, and even if one does, most people do not have the time to do the research that it takes to invest in stocks on their own.

The most common tool to overcome this barrier is called a mutual fund. A mutual fund is a pool of investment created by an asset management company to make it easier for investors to invest their money without having to do research for themselves or even having large sums of money. They then take the money from all their investors, conduct their own research, and then invest the money in a variety of different investments.

Mutual funds are classified by which types of securities they invest in. A stock mutual fund, for example, is not allowed to invest in anything but stocks. A fixed income fund is not allowed to invest in stocks. A balanced fund is allowed to invest in both stocks and bonds, but cannot be invested in just one category of investment.

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For the overwhelming majority of investors, mutual funds are the most logical choice of investment. There are 23 asset management companies in Pakistan and they offer a wide variety of mutual funds. A list of all asset management companies and every single mutual fund in the country is listed on the website of the Mutual Fund Association of Pakistan’s website.

To invest in a mutual fund, first select which type of mutual fund you want. There are no specific rules for this, except that stock funds are generally good for investments where you do not anticipate needing the money for 10 years or longer, whereas fixed income funds are for situations where you anticipate needing the money within a shorter duration.

Now comes the hardest part: suppose you have decided you want to invest in a stock fund. Which stock fund should you get? There are 34 equity funds in Pakistan (a much smaller number than more developed markets, but nonetheless, a considerable variety from which to choose). For that decision, it comes down to two things: track record and institutional quality. Generally speaking, a longer track record is better and index funds are safer than other types of funds.

So let’s suppose you decide that you want to start investing in the KSE Meezan Index Fund. How would you do that? Well, you would start by going to the offices of Al Meezan Investment Management. Some, but not all, branches of Meezan Bank also sell mutual funds; and there is usually a sign outside the window if they do.

You will be asked by their sales staff to fill out two forms. One is a form from the investment management company itself. The second is a form from the Central Depository Company of Pakistan. The CDC is the central registry of all investment transactions in the country. It exists to make sure that your asset management company or brokerage firm cannot simply run away with your money. It is not impossible for investors to be cheated by their broker or fund manager, but it is now more difficult because of the CDC.

At this juncture, there are three very critical things to take note of. Firstly, get a receipt for the amount of money you deposit with the company. Secondly, make sure they tell you IN WRITING how many units you have bought and at what rate. And thirdly, make sure you ask them how to check your account online. Do not leave the place until you have all of this information.I would highly recommend opening a systematic investment plan. It is possible at most mutual fund companies to open an account with Rs5,000 and then make subsequent investments of Rs1,000 each. UBL Fund Managers even let investors make subsequent investments for Rs500 each. Each asset management company has different methods for making systematic investments, but the best method for doing so is to instruct the bank in which you hold your main current account to make those transfers to your mutual fund on your behalf every month.

One last bit: the vast majority of mutual funds are run by the asset management companies that are the subsidiaries of either banks or brokerage companies. Banks tend to have a footprint in major cities throughout Pakistan but brokerage firms are almost entirely based in Karachi, although most of the major ones have branches in Lahore, Islamabad and Faisalabad as well. I have spent the bulk of my career in Karachi and thus the information I provide may have a Karachi bias. If people from other cities face difficulties in using the information in this column, please do contact me.

Published in Dawn, Sunday Magazine, June 1st, 2014