1.

Introduction:
A mutual fund is a collective scheme which pools the savings of many people from many
investors. The money which is collected is invested in securities such as stocks, bonds, money
market instruments and similar assets. A mutual fund is managed by a management company.
The portfolio of mutual fund is managed by a portfolio manager, whose responsibility is to invest
on different securities, and satisfies the desire of the investors. It is the investment objective of
the fund that guides the manager in selecting the various securities for the fund. The selection of
securities is done by analyzing economic conditions, industry trends, government regulations and
their impact on the stocks and forecasts for the specific stocks to project the future outcome
generated by the companies.
The main advantage of mutual fund is that it gives small investors access to professionally
managed, diversified portfolios because it is hard for small investor to manage portfolio and
examine the trends with small capital. The other advantages are reduction of risk through
diversification and higher return.
There are two types of fund according to structure; Open-ended funds and close-ended funds.
Open-end mutual funds are those where subscription and redemption of shares are allowed on
continuous basis. The price at which the shares of open-end funds are offered for subscription
and redemption is determined by the NAV after adjusting for any sales load or redemption fee.
These funds are not traded in stock market rather Asset Management Company redeems the
units/shares. On the other side close-ended mutual funds are those where the shares/units are
initially offered to the public and are then traded in the secondary market and can be freely
traded.
Mutual fund can make money by three ways; First way is dividend which is received by funds
from other joint stock companies whose shares the fund holds. This may be used to pay dividend
to its own unit holders. The second way is the capital gain which is generated by sale/purchase of
stocks is also used to pay dividends to the investors of the fund. The third way is appreciation of
share/unit price of the mutual fund.
1.1 Background:

The origin of the Mutual Fund Industry (MFI) in Pakistan dates back to the 60s. National
Investment Trust Limited a public sector entity, established in 1962, launched the first open end
fund, NIT, in Pakistan. This was followed with the setting up of Investment Corporation of
Pakistan in 1966, a state controlled Development Finance Institution which launched and
managed 26 closed end mutual funds. It was in the 70s that the private sector was allowed to
launch close end funds and it was not until the 90s, with the establishment of The Mutual Fund
Association of Pakistan (MUFAP) in 1996, a trade body of the asset management companies,
that the private sector was allowed to launch open end funds as well. MUFAP was formally
licensed, in 2001, as a public limited company (by guarantee) under Section 42 of the Companies
Ordinance 1984.
The Securities and Exchange Commission of Pakistan (SECP) is the regulator of the Mutual
Fund Industry (MFI) in Pakistan and has taken various steps for the development of this industry.
Asset Management Companies are formed under the Non-Banking Finance Companies &
Notified Entities Regulations (NBFC) 2008. In view of changing market conditions and to bring
uniformity in comparison of different funds to enable investors to make informed decisions, the
SECP in March 2009 revised the categories of open-end mutual funds on the basis of asset
classes and risk profile.
The growth of the MFI has not only driven by the performance of the stock market but also by
the increasing investors appetite, particularly of financial institutions and corporates, for new
innovative investment products that offered optimal risk return rewards.
In 2012 almost one hundred and twenty five open-ended mutual funds according to their
different categories were floating in Pakistani financial market like Income Funds, Islamic funds,
balanced funds, Asset Allocation funds, pure Equity funds and Money Market Funds.
Karachi Stock Exchange is the main stock market in Pakistan with market capitalization of
4,242.27 Billion as on January 18, 2012. Founded in 1947, Karachi Stock Exchange (KSE) is the
biggest and most liquid exchange in Pakistan. It was declared the Best Performing Stock
Market of the World for the year 2002. After the market crash in 2008 the market started its
recovery in the beginning of 2009 and then it started to break its records. The KSE benchmark
100 index crossed the limit of 17,000 points on December 31, 2012. The achievements were
made in spite of the fact that the law and order situation in the country remained shaky.

Objective of the Study:

Our main purpose is to analyze the performance of open-ended mutual fund performance in
Pakistan to show that the managers of these funds are doing well or bad.
Importance of Study:
The study is important as it gives investor a chance to judge which mutual fund is best for
investing considering risk and return perspectives. This field is unexplored in Pakistan as little
research work is done in this field. Mutual fund industry is growing in Pakistan and it is now
capturing the attention of foreign investors also due to its attractive return.
Sequence of Study:
The first section provides a brief introduction and background of mutual fund industry. The rest
of the paper is as follows. Section 2 will provide a review some of the existing literature on the
subject, section 3 will build up on data and empirical methodology, empirical results will be
reported in section 4 and section 5 will conclude.