Performance Evaluation of Mutual Funds in Pakistan for the period 2004-2008

Performance Evaluation of Mutual Funds in Pakistan for the period 2004-2008
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Transcript   I NTERDISCIPLINARY J OURNAL O F C ONTEMPORARY R  ESEARCH I N B USINESS   Performance Evaluation of Mutual Funds in Pakistan for the Period of    2004-2008   Akmal Shah z ad  MS Scholar, Iqra University H-9, Is la mabad   everbr  i gh t er2011@gm ail .com   Dr. Bashir Ahmed Khilji Professor & Head of   Economic Department. National University of   Modern Languages Sector H-9, Isl a mabad   Irfan Ahm e d  MS Scholar, Iqra University H-9, Is la mabad   Nisar Ali Asgha r  MS Scholar, Iqra University H-9, Is la mabad   Javed A li  MS Scholar, Iqra University H-9, Is la mabad    A  UGUST 2010    V  OL 2, N O 4   Listed in ULRICH ’ S   Abstract  Mutual funds are considered as vehicle for investment in stock market. These not only reduce the risk but also reduce the transaction cost. Mutual performance is a common topic in all country to  be studied. This  paper   e v al uates the mutual funds in Pakistan; provide information to different stake holder regarding current and future developments. Simple descriptive tools employed to intemperate data. Result shows that on overall basis, funds industry outperform the market. The future of industry depends on the performance of funds industry and the role of regulatory bodies. Key Words: Mutual Fund, Performance, Regularity body, Stock Market, Investment. 1. Introduction  Mutual funds performance is one of the most commonly studied topics in investments area in the maj or  it y   coun t r  i es.  This is because the availability of data and importance of mutual funds as vehicle for investment in the stock market. Mutual funds provide many benefits to their investors. Such benefits are as follow.  C OPY R  IGHT © 2010 Institute of Interdisciplinary Business Research 347   I NTERDISCIPLINARY J OURNAL O F C ONTEMPORARY R  ESEARCH I N B USINESS    A  UGUST 2010    V  OL 2, N O 4   They reduce the risk of investing in the stock market by diversification. Being Customer Services that mutual funds provide such as record keeping, providing market updates, suggestions on investment opportunities and so on. They provide professional management by experts in the stock market. Mutual funds also reduce Transaction Costs for investors in the sense that the only  performance that investors need to see is of t h e fund and not the stocks or the assets held by the fund and can easily make decisions on that basis. By pooling of investment funds, they allow small investors to hold a diversified portfolio. The fund portfolio is al so    profess i on a lly  managed and monitored by professionals in the market who have both experience and information for  profitable security selection. The benefits of mutual funds mentioned above are consistent with the ones also identified by Sipra (2006). Mutual funds are getting much popularity around the world this is because mutual funds today have assets under management worth not millions or billions but trillions of dollars. Mutual funds have been in existing for a l ong  ti me,  U.S being the pioneer in mutual funds industry where the growth of mutual funds started after the World   War   II when the mutual funds had assets worth $1.2 billion which then reached $6 trillion by 2002 (Mahoney, 2004). Mutual Funds provide an investment opportunity to individual investors which are professionally managed. Mutual funds cater to the needs of especially those investors who do not have much understanding of the financial markets, providing them with an opportunity to hold diversified  portfolios thus minimizing the overall risk of their investment The first mutual fund introduced in Pakistan was the National Investment Trust (NIT) in 1962 which was an open-ended fund. The NIT was and is still managed by the public sector. After  NIT, the Investment Corpora ti on   of   Pakistan (ICP) launched several schemes of mutual funds in Pakistan, which were all closed-ended sch e mes.   Th e ICP units were also publicly owned, but were then privatized with the passage of time. Despite overwhelming interest in mutual funds, they failed to catch the attention of both investors and academics i n  Pakistan until recently when many privately owned funds started to be introduced by various financial institutions in Pakistan. On the academic side, the main contributions for mutual funds came from Sipra (2006), Shah & Hijazi (2005), Moeen & Shah (2006) and Akbar & Syed (2005).  C OPY R  IGHT © 2010 Institute of Interdisciplinary Business Research 348   I NTERDISCIPLINARY J OURNAL O F C ONTEMPORARY R  ESEARCH I N B USINESS    A  UGUST 2010    V  OL 2, N O 4   Observing the overall Mutual Funds Industry clearly highlights that there has been a phenomenal growth in the Industry; both in terms of assets under management and the number of funds (Shah & Hijazi, 2005). Shah & Hijazi (2005) indicate that total assets under management of mutual funds including both open and closed ended funds was around (Pakistani Rupees) PKR 29 billion which rose to PKR 112 billion in 2004. The value of assets under mutual funds ’  management have risen four times within a span of four year touching PKR 395 billion as of 31st March 2008 (source: Mutual Fund Association of Pakistan website). However the major contribution of this overall industry growth came from the open ended funds which currently have assets under management worth PKR 340 billion and the rest PKR 55 billion is held by the closed-ended funds. The assets of open-ended funds, according to Shah & Hijazi (2005), were PKR 25 billion in 2004 and PKR 63.86 billion in 1997. These figures show how rapidly the open-ended mutual funds have grown.  Now, narrowing the focus to open-ended funds, by the end of June 2008 there are around s i x t y five open ended funds of various different nature. There are Islamic funds, Asset Allocation funds, Balanced funds,  pure   Equi t y  funds, Income Funds, Money Market Funds and even recently two important categories namely fund of funds and Index Tracker funds have been introduced. So in spite of being under developed, the Pakistani Mutual fund market has got a wide range of funds catering to various natures of investors. All mutual funds are regulated by the Securities & Exchange Commission of Pakistan (SECP) which is also the regulatory body for the stock exchanges. In addition to that, most of the mutual funds have Central Depository Corporation (CDC) as their trustee which also takes care of stock purchase/sale taking place in the stock exchanges. If viewed in the perspective of Product Life Cycle, then it can be said that the Pakistani Mutual Funds industry is somewhere between the introduction and growth phase, though the first mutual fund was launched in 1962, but the market did not start to develop and mature the way it has recently done. Most of the funds in the market are privately owned by both new and established Investment Companies and Asset Managemen t Compani e s.  However, the oldest player in the market i.e. the National Investment Trust which still holds around one quarter of the total assets with net assets of around PKR 104.94 billion. The stock market is an important investment destination for equity based mutual funds around the world and so is in the case of Pakistani Mutual Funds Industry. Karachi Stock   C OPY R  IGHT © 2010 Institute of Interdisciplinary Business Research 349   I NTERDISCIPLINARY J OURNAL O F C ONTEMPORARY R  ESEARCH I N B USINESS    A  UGUST 2010    V  OL 2, N O 4   Exchange (KSE) is the major and the most developed exchange of the country. It can be said that the time when most of the mutual funds were introduced was the time when the stock market started rising. The KSE-100 index marked an increase of 388% within a period of three years from 2001 to 2003 and touched the 6,000 index level which was the highest KSE-100 had touched. The index continued rising and the KSE became one of the best markets in the world. The country attracted huge foreign investments and everything was going smooth till 2005, when the market crashed badly after reaching the all time highest level of 10,000 points. The crash was one of the worst (Mangi; Businessweek, 2005). Since then the stock exchange has seen various crisis in the subsequent years while vanishing the trust of a lot of investors; both foreign and local. Money/bond market is another important investment destination for income/money market based mutual funds. Unfortunately, Pakistan lacks such markets as there is no such established money market in the country. However there are a few money market indicators like t-bills, KIBOR (Karachi Interbank Offer Rate), Pakistan Investment Bonds (PIBs) etc but these are only available to institutional investors and not to general public. For general public, only a few government bonds are available and therefore there is a great need for the development of an organized money/bond market. Lastly, it is again emphasized that the entire mutual fund industry is at a very initial stage and the entire industry is very inexperience to reach up to the level of other developed markets. From the above overview of the industry, it is clear that extensive interest has been shown by both the Government and the Private sector of the country and the  performance evaluation done in the paper would tell us that by far how much the industry has  been able to accomplish its goals and we would then be able to identify the potential in the industry. Since the last thirty years or so, the popularity and interest in mutual funds has grown extremely and many academics and researchers have attempted to assess performances and other related aspects of mutual funds around the world. The objective of these researches is to provide information for various stakeholders of this multi-billion dollar industry. In this paper the focus has made to evaluate the performance of Pakistani Mutual Fund industry, which is relatively newly developed and a lot of open-ended and closed funds have recently been introduced.  C OPY R  IGHT © 2010 Institute of Interdisciplinary Business Research 350 
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