The factors affecting the performance of mutual funds in Pakistan

A research proposal submitted to the Department of Management

Sciences, Bahria University Karachi Campus, in fulfilment of the
requirement for the MBA degree Thesis

Student Name Asad Ali Minhas

Registration No. 20124

FALL 2014

Bahria University Karachi Campus

1. Problem Background and Aim of Study
Mutual Funds Association of Pakistan defines mutual funds using holistic approach by terming
mutual funds as to be a collective investment scheme. This investment scheme is for those
individual who wanted to invest in securities such as bonds, stocks, money market instruments and
similar assets. This investment scheme facilitate individual to park their investments in such
investment vehicles which otherwise would be quite difficult with lower initial capital investment.
MUFAP further state well diversified and professionally managed Investment portfolio of investment
are the salient futures of Mutual funds. On the base of the proportion of investment each individual
receive their share which comprises of capital appreciation and any other income earned by the
underlying assets of funds.(MUFAP, MUFAP). This definition of mutual funds makes it to be an ideal
investment vehicle in the economy like Pakistan.

In 1962 Mutual Funds were for the first time introduced in Pakistan, by the initiative taken by
Government of Pakistan by launching the first scheme of National Investment Trust. Mutual funds
are found to be increasingly preferred mode of investment, especially in recent past years; it is
evident from the growing number Asset management companies. AMC’s number has increased
from 38 in 2004 to 158 in 2013 with average percentage change of 16% for the period. Another
trend highlighting the boom in mutual funds industry is the number of newly introduced Funds,
open funds are facing rapid growth with average percentage change of 20% for 2004 to 2013. As per
Mutual fund association of Pakistan the current volume of funds is 383,481,291, 000 PKR. (MUFAP,
Industry statistics)

With the above highlighted importance of mutual funds and growth potential, mutual funds are
becoming the center of attention especially for researchers. Researchers are studying different
aspects of mutual fund like advertisement impact, like passively and actively managed funds,
investing in international funds and many more. One of most studied aspect is the performance of
mutual funds. Mutual funds can be evaluated through different Performance indictors like Jensen’s
alpha, absolute performance, relative performance, standard deviation, Sharpe ratio. On close
analysis we can identify the mutual funds performance indicators either to be category ranking or
risk adjusted returns. Performance analysis should be usefully performed with a multi-criteria
approach integrating all its various aspects (Razafitombo, 2010). A multidimensional approach
should indicate the performance of a particular fund against its determinants. A lot of research work
has been done in order to study the impact of determinants of factors affecting the performance of
mutual funds. In Pakistan the study of Mian Sajid Nazirand Muhammad Musarat Nawaz on “The
Determinants of Mutual Fund Growth in Pakistan”has set the base for the performance evaluation
of Mutual funds, with in depth analysis their study pointed out positively affecting determinants
asset turnover, family proportion and expense ratio other hand management fee and risk adjusted
returns are negatively affecting determinants. (Nazir & Nawaz, 2010). Similarly another study
conducted by TALAT AFZA and ALI RAUF, focusing performance evaluation of Pakistani mutual funds
identifies that there are different attributes (like fund size, expenses, age, turnover, loads and
liquidity) of mutual funds that affect the performance of mutual funds. (Talat & Ali, 2009). While
Mahreen and Nawazish had further advanced the work of Mian Sajid Nazirand Muhammad Musarat
Nawaz during their evaluation of mutual fund performance in emerging economy of Pakistan had
identified that during the slowdown of 2008 the mutual funds were most impact by the devaluation
of Term finance certificates (Mahmud & Mirza, 2011). Muhammad Arshad in his study
“Determinants of Expense Ratio in Open End Mutual Funds of Pakistan” had further verified,
expense ratio to be a factor affecting the performance of mutual funds, he agreed that mutual funds
are affected by expense ratio. He had extended the work of expense ratio by dissolving expense
ratio and then evaluated their ultimate impact on Mutual funds while considering the determinant
of Expense ratio. According to Arshad, the study base for mutual funds can be characterized by time
period and therefore do not provide sound framework for the parameter for evaluating
development of industry and its sensitivity to expense ratio. He had explained expenses to be the
sum of different fees including management, audit, and trustee fees; he had also added the
operating cost. In his study Arshad had concluded that among the determinants of Expense ratio, all
variables size, age, nature except sponsor of fund has significant impact on expense ratio which has
been previously validated by other researcher in different parts of the world. (Arshad, September
2013)

While considering above all, I would like to study the impact of the determinants of performance of
mutual in Pakistan in the time period from 2007 till 2012, the purpose of selecting this time bar is
because it includes the time period or recession and recovery. By conducting this study we would be
able to evaluate the impact of determinants of performance of mutual funds during the era of
recession. Since the time bar also includes era of recovery so this study will also highlights how well
that have been recovered.
 1.1 Research Question(s)/Hypothesis(es)
How the factors are affecting the performance of mutual funds during the recession?

2. Research Method
Regression analysis will be use to chalk out effect of factors on the performance of mutual
funds. The performance of Mutual funds will be return from these funds where as the factors
will be considered from the extensive literature review and interviews from the industry
experts. Thus return will be our dependent variable and the factors will be independent
variable. While discussing the factors of performance we will not constraint ourselves to
existing literature review. The factors affect on the performance will be elaborated through a
properly constructed conceptual frame work. We will put our efforts to dig out some new
variables. Regression analysis will also highlight the interdependence of the factors of
performance for mutual funds in Pakistan.

2.1 Natures of Research

Since we want to identify how the factors have affected the performance of mutual funds
during 2007 to 2012, we term our research primarily explanatory in nature. The selected time
of reference has a special feature that it comprises of era of recession and recovery hence it is
empirical to put some effort to identify whether there are some other factors that have
impacted the performance of funds. This will add the essence of exploratory research to our
study.

2.2 Sampling Technique and Sample Size

Objective population for our study is open ended fund existing in the selected time. Sample
adopted for this study will exhibit 25% of the industry by volume. Our sample size will not
be based on the asset management companies.

2.3 Data Collection Method

The data required to conduct our study is related factors affecting the performance of mutual
funds and return of funds for 2007 to 2012. Literature review and interviews from industry
experts will help us in building conceptual framework for factors affecting the performance
of mutual funds. Whereas the data for the returns for the mutual funds can be gathered from
Mutual Fund Association of Pakistan1.

2.4 Data Integration Method

Primarily our data will be quantitative in nature. Data set will be of return (dependent
variable) and factors affecting these return (independent variable). Our dependent variable
for sure is quantitative variable, whereas there are chances for our independent variable that

1
Mutual Fund Association of Pakistan is the government body, working under SECP for regulating mutual fund
industry in Pakistan.
it might be qualitative in nature. We will be doing coding technique for any possible
qualitative data set for our dependent variable. Coding will help us in conducting the our
regression analysis and analysis of variance.

3. Organization of the Thesis

The thesis will comprise six chapters, a list of references / bibliography and appendices.

Chapter 1 will constitute the problem background, aim of the research, research
questions/hypothesis and objectives and introduction to the organization/sector over which
the research is being conducted etc.

Chapter 2 will provide information on research methodology – nature and kind of research,
sample size, sampling method, data collection methods employed during the study, kind of
data collected, and the way the data is integrated.

Chapter 3 will provide critical review of the existing literature containing the critical
academic debate about (the topic) with the views of the academicians’ and practitioners’ on
the matter.

Chapter 4 will comprise the research data of both kinds – primary as well as secondary –
collected and integrated. It will also show findings of the data and their interpretation and
analysis.

Chapter 5 will comprise a critical debate on the study drawing on the literature review and
contrasting it with the findings of this study.

Chapter 6 will constitute recommendations and conclusions to the study.

4. Time Horizon

Like a characteristic master’s degree thesis work, this research work will be time constrained
and, accordingly, I will have to resort to short-term and cross-sectional study instead of
adopting a longitudinal approach.

5. Time Scale
 6. References

Arshad, M., September 2013. Determinants of Expense Ratio in Open End Mutual Funds of Pakistan.
Journal of Asian Development Studies, 2(3), pp.58-71.

Mahmud, M. & Mirza, N., 2011. An Evaluation of Mutual Fund Performance in an Emerging. The Lahore
Journal of Economics, 16(SE), pp.301-16.

MUFAP, n.d. Industry statistics. [Online] Available at:

http://mufap.com.pk/pdf/yearbook/2013/PDF/Yearbook/18.%20Statistics.pdf [Accessed Twenty two
September Twenty fourteen].

MUFAP, n.d. MUFAP. [Online] Available at: http://mufap.com.pk/pdf/WRMF.pdf [Accessed 22

september 2014].

Nazir, M.S. & Nawaz, M.M., 2010. The Determinants of Mutual Fund Growth in Pakistan. International
Research Journal of Finance and Economics, 54.

Razafitombo, H., 2010. A Statistical Analysis of Mutual Fund Performance Measures: The Relevance of
IRs, Betas, and Sharpe Ratios. Journal of Index Investing, 1(2).

Talat, A. & Ali, R., 2009. PERFORMANCE EVALUATION OF PAKISTANI MUTUAL FUNDS. Pakistan Economic
and Social Review, 47(2), pp.199-214.
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Thesis Tutor Signatures ___________________________________Date_____________

Thesis Coordinator Signatures _____________________________ Date_____________