Sept. 1 (Bloomberg) -- BMA Capital Management Co., a Pakistan investment bank, plans to start mutual funds by October to expand its business.

The size of combined funds will be as much as 5 billion rupees, Muddassar Malik, chief executive officer of BMA Asset Management, a unit of BMA Capital, said today in a phone interview in Karachi.

The first fund will ensure investors the return of their principle, while the second will invite fund managers to invest in Pakistan's stock market and bonds, Malik said.``Primarily we will invest in the stock market but some portion will be dedicated to government bonds and other securities,'' Malik said.

Pakistan's government is encouraging companies to start mutual funds to help expand the stock and bond markets. The benchmark Karachi Stock Exchange index has gained 25 percent since Jan. 1.

Investment in mutual funds in Pakistan, a nation of more than 150 million people, is about 5 percent of the country's 2.4 trillion rupees of bank deposits.

The Securities and Exchange Commission of Pakistan, the market regulator, has allowed BMA Capital to raise the amount for the open-end and closed-end mutual funds through the stock market, he said.