CAPITAL markets offer various investment options tailored to different financial goals and risk profiles, mainly through the debt and equity markets. The debt market provides stable returns with lower risk, making it ideal for conservative investors. In contrast, the equity market offers higher return potential but with greater volatility. Investors can participate in these markets directly through brokerages or banks, or indirectly via mutual funds offering diversification and professional management.

Direct investment in Pakistan’s capital markets presents a bleak picture. According to the Pakistan Stock Brokers Association (PSBA), as of December 2024, there were 357,419 Unique Identification Numbers (UINs) registered on the stock market, representing just 0.19 per cent of the country’s adult population. This statistic highlights a significant gap in market participation, especially when compared to countries like India, where over 12pc of adults are actively involved in the stock market.

While financial literacy is crucial to increasing investor participation, there are several other factors that need to be addressed to simplify and deepen investment in Pakistan’s capital markets.

In more developed markets, brokerage trading platforms offer a comprehensive yet user-friendly experience, providing access to a wide range of investment opportunities beyond just stocks. These platforms allow investors to diversify their portfolios through investments in government and corporate bonds, as well as more sophisticated products like Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), Initial Public Offerings (IPOs), futures contracts, and marginable stocks.

Only 0.19pc of the country’s population invests in the stock market compared to 12pc in India

The beauty of these platforms lies in their ability to present all these investment options in a single, easy-to-navigate interface, giving investors a complete suite of assets at their fingertips. Such platforms foster better price transparency, enabling users to compare the performance of various assets and assess their unique characteristics.

This transparency allows investors to make more informed decisions, leading to a more efficient and accessible market for both novice and seasoned investors alike.

In terms of product innovation, one product that could be introduced is hybrid ETFs — investment funds that combine both debt and equity in a single product. This type of ETF could provide investors with a balanced risk-return profile, appealing to both conservative and growth-oriented investors.

The Securities and Exchange Commission of Pakistan (SECP) has already issued a framework for such products, which could help unlock new investment avenues and attract a broader base of investors.

Additionally, the international markets represent a largely untapped opportunity that could not only attract foreign investment into Pakistan but also provide local investors with access to the high-growth potential of global markets.

By creating specialised ETFs or REITs that are listed on international stock exchanges, Pakistan could offer international investors an avenue to gain exposure to high-yielding sectors within the country, such as real estate or other emerging industries. This would help draw foreign capital while showcasing Pakistan’s investment potential to a global audience.

On the other side, Pakistan can also leverage this opportunity for its local investors. By introducing ETFs that track international indices or invest in global stock markets, particularly in high-growth sectors like technology or renewable energy, Pakistani investors can diversify their portfolios and gain exposure to the world’s most dynamic markets. These investments could be PKR-denominated, making them easily accessible for local investors, while offering the potential for higher returns from international markets.

Indirect investment in capital markets through mutual funds can be enhanced by offering more diversified options. For instance, equity funds could be categorised based on market capitalisation, focusing on small-cap and mid-cap stocks, which represent high-growth, emerging companies. These stocks often offer opportunities for profit by identifying undervalued assets.

Additionally, sector-specific funds targeting high-growth areas like financials, technology, or construction could appeal to investors looking to focus on specific industries. International funds tracking markets like the Gulf Cooperation Council (GCC) or China can also provide Pakistani investors access to global growth, diversifying portfolios and mitigating local market risks. By offering these diverse options, mutual funds can provide more tailored, high-growth investment opportunities for investors in Pakistan.

Beyond public equity and fixed-income markets, private equity and private debt are becoming increasingly popular in many countries as investment options for those seeking higher returns or greater diversification. In Pakistan, while private equity has been gaining traction, crowdfunding for the private debt market remains limited.

These alternative investment modes offer significant growth potential, particularly in emerging sectors like technology, which spans various industries. As these markets develop, they can provide valuable opportunities for investors looking to tap into high-growth, early-stage companies and projects.

To expand beyond traditional investment options, a collaborative effort from investment forums, regulators, and financial institutions is essential. By introducing modern investment tools, the financial market can become more regionally inclusive, open and diverse. This would not only provide investors with broader opportunities but also foster a more dynamic and accessible market for all participants.

The writer is a seasoned Islamic Finance practitioner

Published in Dawn, The Business and Finance Weekly, February 10th, 2025