Contents

Introduction.....................................................................................................2
MUTUAL FUNDS ASSOCIATION OF PAKISTAN................................................2
WHAT IS MUTUAL FUND.............................................................................2
TYPES OF MUTUAL FUNDS............................................................................2
Open Ended...............................................................................................2
Close Ended...............................................................................................2
STRUCTURE OF MUTUAL FUND.....................................................................3
CATEGORIES OF MUTUAL FUND.................................................................3
Objectives of the Project - Mutual Funds......................................................5
Significance of Study....................................................................................5
LITERATURE REVIEW........................................................................................6
PERFORMANCE OF MUTUAL FUNDS..............................................................6
INVESTORS BEHAVIOUR...............................................................................6
METHODOLOGY................................................................................................7
SAMPLE.........................................................................................................7
SECONDARY DATA SAMPLING....................................................................7
Methodology.................................................................................................7
Sharpe Ratio..............................................................................................7
Sortino Ratio..............................................................................................8
Treynor Ratio.............................................................................................8
Information Ratio.......................................................................................9
JENSENS ALPHA (ALPHA)..........................................................................9
HYPOTHESES................................................................................................9
Analysis And Discussion.................................................................................10
Treynor ratio...............................................................................................10
Sharp Ratio.................................................................................................10
Sortino........................................................................................................11
Information Ratio........................................................................................11
Conclusion.....................................................................................................11
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Limitation and recommendation.................................................................12

References:....................................................................................................13

Page 2 of 15

Introduction
MUTUAL FUNDS ASSOCIATION OF PAKISTAN
Mutual Funds Association of Pakistan is the trade body duly licensed by the
Government of Pakistan for the mutual fund industry in Pakistan. All Asset
Management Companies (AMCs) and Investment Advisory ( IAs ) licensed by
SECP to launch Mutual Funds and perform Investment Advisory Services are
required under NBFC Rules 2008 to become Members of MUFAP.
WHAT IS MUTUAL FUND
A mutual fund is a collective investment scheme, which specializes in
investing a pool of money collected from investors for the purpose of
investing in securities such as stocks, bonds, money market instruments and
similar assets. One of the main advantages of mutual funds is that they give
small investors access to professionally managed, diversified portfolios of
equities, debt instruments i.e. TFCs and Govt. Securities and other securities,
which otherwise would be quite difficult (if not impossible) to create with a
small amount of capital. The income earned through these investments and
the capital appreciations realized are shared with its unit holders in
proportion to the number of units owned by them.
TYPES OF MUTUAL FUNDS
There are basically two types of Mutual Funds:
Open-Ended Mutual Funds
Closed-Ended Mutual Funds
Open Ended
These are mutual funds which continually create new units or redeem issued
units on demand. They are also called Unit Trusts. The Unit holders buy the
Units of the fund or may redeem them on a continuous basis at the
prevailing Net Asset Value (NAV). These units can be purchased and
redeemed through Management Company which announces offer and
redemption prices daily.
Close Ended
These funds have a fixed number of shares like a public company and are
floated through an IPO. Once issued, they can be bought and sold at the
market rates in secondary market (Stock Exchange). The market rate is
announced daily by the stock exchange.
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STRUCTURE OF MUTUAL FUND

Mutual Funds are operated by Asset Management Companies (AMCs) which
exists in the form of a public limited company registered under Companies
Ordinance, 1984. The AMC launches new funds Fund Managers Returns
Securities Investors Invests in Generate Passed back to Pool their money with
WHAT ARE MUTUAL FUNDS? through the establishment of a Trust Deed,
entered between the Asset Management Company and the Trustee, with due
approval from the SECP under the Non-Banking Finance Companies
(Establishment and Regulation) Rules, 2003 (the Rules). The Trustee
performs the functions of the custodian of the assets of the Fund. The trustee
ensures that the Fund Manager takes the investment decisions within the
defined investment policy of the mutual fund. Under Pakistan law, banks and
central depository companies, approved by the SECP, can act as trustee. At
present Central Depository Company of Pakistan (CDC) is acting as Trustee of
most of the funds of the industry. The Securities & Exchange Commission of
Pakistan (SECP) is the regulator of mutual funds industry and is very
stringent in issuing licenses to fund management companies, especially in
the case of Collective Investment Scheme (CIS). The SECP also carries out
continuous monitoring of mutual funds through reports that the mutual funds
have to file with the SECP on a regular basis. In addition, SECP conducts onsite inspections of the AMCs. How do Mutual Funds determine their Unit
Price? A fund's Net Asset Value (NAV) represents the price per unit. The NAV
is equal to the market worth of assets held in the portfolio of a Fund, minus
liabilities, divided by the number of units outstanding.
NAV = Current Market Value of all the Assets Liabilities
Total Number of Units Outstanding
In order to determine the sale price of the unit sales load is added to the
NAV. In case there is no sales load the NAV will be the sale price as well as
the redemption price. The sale and redemption price is declared on a daily
basis by the Funds and can be viewed on their websites.
CATEGORIES OF MUTUAL FUND
SECP the Regulator has categorized the Schemes of mutual funds as under:Equity Scheme: An equity scheme or equity fund is a fund that invests in
Equities more commonly known as stocks. The objective of an equity fund is
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long-term growth through capital appreciation, although dividends and

capital gain realized are also sources of revenue.
Balanced Scheme: These funds provide investors with a single mutual fund
that invests in both stocks and debt instruments and with this diversification
aimed at providing investors a balance of growth through investment in
stocks and of income from investments in debt instruments.
Asset Allocation Fund: These Funds may invest its assets in any type of
securities at any time in order to diversify its assets across multiple types of
securities & investment styles available in the market.
Fund of Fund Scheme: Fund of Funds are those funds, which invest in
other mutual funds. These funds operate a diverse portfolio of equity,
balanced, fixed income and money market funds (both open and closed
ended).
Shariah Compliant (Islamic) Scheme: Islamic funds are those funds
which invest in Shariah Compliant securities i.e. shares, Sukuk, Ijara sukuks
etc. as may be approved by the Shariah Advisor of such funds. These funds
can be offered under the same categories as those of conventional funds.
Capital Protected Scheme: In this type of scheme, the payment of original
investment is guaranteed with any further capital gain which may accrue at
the end of the contractual term of the Fund. Such funds are for a specific
period.
Index Tracker Scheme: Index funds invest in securities to mirror a market
index, such as the KSE 100. An index fund buys and sells securities in a
manner that mirrors the composition of the selected index. The fund's
performance tracks the underlying index's performance.
Money Market Scheme: Money Market Funds are among the safest and
most stable of all the different types of mutual funds. These funds invest in
short term debt instruments such as Treasury bills and bank deposits.
Income Scheme: These funds focus on providing investors with a steady
stream of fixed income. They invest in short term and long term debt
instruments like TFCs, government securities like T-bills/ PIBs, or preference
shares.

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Aggressive Fixed Income Scheme: The aim of aggressive income fund is

to generate a high return by investing in fixed income securities while taking
exposure in medium to lower quality of assets also.
Commodity Scheme: These schemes enable small investors to take
advantage of gains in commodities such as gold through pooled investments.
They invest at least 70%of their assets in commodity futures contracts,
which include both cash-settled and deliverable contracts.
An investor can invest in any of the above categories of funds in accordance
with his requirements and appetite for risk. For example those who want to
earn high returns over a longer period can invest in Equity Funds whereas
those who want to invest for short term with reasonable return can invest in
Money Market Fund.
Objectives of the Project - Mutual Funds
The main objective of this project report is to know about different mutual
funds and the market position of different mutual funds.
To study the performance of mutual funds in Pakistan.

To study the performance of mutual funds with respect to different

performance attributes.
To develop a framework for performance measure of mutual funds in
Pakistan.
Significance of Study
This project report provides Future of Mutual Funds industry information as
well as awareness level amongst people for Mutual Funds.
The first part of the study gives an outlook to management as to how the
mutual funds are performing in the current market situation as a result what
may be the future of this industry.
Other two parts suggest the management that how many persons are aware
of the mutual funds & what type of mutual funds & other investment channel
they prefer in current Mkt. situation.
This study also is very informative the students who want to understand and
undertake assignments in the industry. This study also facilitates the general
people who can understand the importance and explore the new option for
investment.
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LITERATURE REVIEW
PERFORMANCE OF MUTUAL FUNDS
During early years, the rate of return was the only measure of performance.
Markowitz (1952) & Tobin (1958) suggested risk measure in terms of
variability of returns .Treynor (1965), Sharpe (1966) and Jensen (1968)
compared the returns of professionally managed portfolios to that of some
standard benchmark. Cumby & Glen (1990) and Lahbitant (1995) found
funds underperforming their benchmark. Murthi et. al. (1997) proposed
problems associated with traditional performance measures as identifying
the appropriate benchmark, not accounting for the transactions cost and
introduced Data Envelopment Analysis (DEA) as a performance measure in
terms of efficiency. In Pakistan, Chander (2000) found the funds outperform
while Singh & Singla (2000) found that funds underperform their benchmark.
Gupta (2001) found mixed results. Galagedera & Silvapulle (2002) found that
funds were efficient in long term. In 2004, Gupta & Gupta and Rao et al.
found funds outperforming their benchmark. Lin and Chen (2008) found the
number of efficient funds higher in the year 2003 than 2001 and 2002.
Soongswang & Sanohdontree (2011) found varied outcomes. Some authors
enhanced a new vein of research seeking to analyse the relationship
between funds performance and their attributes are discussed.
INVESTORS BEHAVIOUR
Little effort has been made by researchers to study investors behaviour
towards mutual funds and other investment options. Madhusudhan &
Jambodekar (1996) revealed that investor expect better services while they
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invest for safety of principal, liquidity and capital appreciation. Syama

Sunder (1998) found that the awareness was poor in small cities. Brand
image and return were the prime factors for investment. Panda and Tripathy
(2002) found that investors were unsatisfied except from UTI. Singh and
Chander (2004) concluded that poor regulation and control, under
performance and inefficient management are the cause of non investment.
Desigan et al. (2006) found that women investors are hesitant for investment
in mutual funds. Parihar et al. (2009) found that respondents age, gender
and income were significantly associated with their attitude whereas
education and occupation were not associated with the same. Pandey (2011)
found that younger people aged below 35, graduate people and the salaried
person were easier to sell the funds and there was a large untapped market
there.

METHODOLOGY
SAMPLE
SECONDARY DATA SAMPLING
Sample mutual fund schemes have been selected through following criteria:
Only open- ended mutual fund schemes have been considered because they
possess several advantages over close-ended mutual funds. Data was taken
from the site of Pkistan Mutual fund i.e. www.mupaf.com.pk the data sample
consist of 8 mutual funds taken from a period from january 2012 to january
2015. It consist of 37 observation for each fund. Dat for index was collected
from Kse website and the risk free rate i.e. Kibor rate from the state bank of
Pakistan website.

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Methodology
Sharpe Ratio

The Sharpe ratio, also known as the reward-to-variability ratio, is perhaps the
most common portfolio management metric. The excess return of the
portfolio over the risk-free rate is standardized by the standard deviation of
the excess of the portfolio return. Hypothetically, investors should always be
able to invest in government bonds and obtain the risk-free rate of
return. The Sharpe ratio determines the expected realized return over that
minimum. Within the risk-reward framework of portfolio theory, higher risk
investment should produce high returns. As a result, a high Sharpe ratio
indicates superior risk adjusted performance.
Many of the following ratios are similar to the Sharpe in that a measure of
return over a benchmark is standardized for the inherent risk of the portfolio,
but each has a slightly different flavor that investors may find useful,
depending on their situation.
Sortino Ratio

The Sortino ratio looks similar to the Roy's safety-first ratio - the difference
being that, rather than standardizing the excess return over the standard
deviation, only the downside volatility is used for the calculation. The
previous two ratios penalize upward and downward variation; a portfolio that
produced annual returns of +15%, +80% and +10%, would be perceived as
fairly risky, so the Sharpe and Roy's safety-first ratio would be adjusted
downward.

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The Sortino ratio, on the other hand, only includes the downside deviation.
This means only the volatility that produces fluctuating returns below a
specified benchmark is taken into consideration. Basically, only the left side
of a normal distribution curveis considered as a risk indicator, so the
volatility of excess positive returns are not penalized. That is, the portfolio
manager's score isn't hurt by returning more than was expected.
Treynor Ratio

The Treynor ratio also calculates the additional portfolio return over the riskfree rate. However, beta is used as the risk measure to standardize
performance instead of standard deviation. Thus, the Treynor ratio produces
a result that reflects the amount of excess returns attained by a strategy per
unit of systematic risk. After Jack L. Treynor initially introduced this portfolio
metric, it quickly lost some of its luster to the now more popular Sharpe
ratio. However, Treynor will definitely not be forgotten. He studied under
Italian economist Franco Modigliani and was one of the original researchers
whose work paved the way for the capital asset pricing model.
Because the Treynor ratio bases portfolio returns on market risk, rather than
portfolio specific risk, it is usually combined with other ratios to give a more
complete measure of performance.
Information Ratio

The information ratio is slightly more complicated than the aforementioned

metrics, yet it provides a greater understanding of the portfolio manager's
stock-picking abilities. In contrast to passive investment management, active
management requires regular trading to outperform the benchmark. While
the manager may only invest in S&P 500 companies, he may attempt to take
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advantage of temporary security mispricing opportunities. The return above

the benchmark is referred to as the active return, which serves as the
numerator in the above formula.
In contrast to the Sharpe, Sortino and Roy's safety-first ratios, the
information ratio uses the standard deviation of active returns as a measure
of risk instead of the standard deviation of the portfolio. As the portfolio
manager attempts to outperform the benchmark, they will sometimes
exceed that performance and at other times fall short. The portfolio deviation
from the benchmark is the risk metric used to standardize the active return.
JENSENS ALPHA (ALPHA)
This measure given by Michael C. Jensen (1968) is a regression of excess
fund return with excess market return and has been used by many
researchers worldwide. The Jensens alpha for the sample schemes has been
calculated using Jensens model provided in eq. iii. Rpt Rft = p + p (Rmt Rft) + pt ..............................(iii) Where, Rpt = return on mutual fund
scheme for the year t; Rft = risk free return for the year t; Rmt = return on
the market portfolio in year t p=Alpha, the intercept that measures the
stock selection capability; p =Beta of the portfolio and pt = Error term

HYPOTHESES
Null hypothesis for first objective of the study i.e, to evaluate mutual funds
performance is:
H0: The sample mutual fund schemes do not perform efficiently.
H1: The expected return is greater than estimated return(benchmark return)
H2: The expected return is lesser than estimated return(benchmark return)
H3: Period of the mutual fund schemes is not related to their efficiency.
H4: Past performance of the mutual fund schemes is not related to their
efficiency.
H5: Risk () of the mutual fund schemes is not related to their efficiency.

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Analysis And Discussion

Js
investm
ent

Treynor
rank

Sharp
rank

Sortino

Informati
on

Jensen
Alpha

-0.5269
8

Js
Meezan Hbl
growt invste
income Alfalah
h
mtn
fund
fund
0.01
0.006
68 0.0027 0.0170
8
7

Alfala
h ghp
value
fund

Alfala
h ghp
cash
fund
0.04
0.08
22
13

alfala
h ghp
incom
e
fund
0.03
78

0.05
70

0.56
17

0.24
71

-0.4525

0.15
57

0.0163

0.2127

0.038
9

-0.4555

1.24
01

2.0669

0.049
3

0.07
32

0.49
24

0.24
85

0.2028

0.292
2

0.39
21

1.13
95

0.91
08

0.007
6

0.00
16

0.00
94

0.00
87

-1.0050

-0.0081

0.13
80

0.47
06

0.0230

0.2448

0.0101

0.1363

Treynor ratio
Treynor ratio measures how much excess returns a fund has generated
relative to the market risk it is exposed to
Five of our fund gives positive ratios as per market risk.
JS Income fund gives the highest ratio of return than the risk in the market
And the HBL income fund is highly effected by market risk at it is the
negative return.

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Sharp Ratio
Sharpe ratio measures how much excess returns a fund has generated
relative to the total risk it is exposed to
Only four of the funds give positive ratio against the risk fund is facing.
Sortino
The Sortino ratio, on the other hand, only includes the downside deviation.
This means only the volatility that produces fluctuating returns below a
specified benchmark is taken into consideration
Only three funds are efficient against risk. And they gives excessive return
than the minimum acceptable return.
Information Ratio
In contrast to the Sharpe, Sortino ratio, the information ratio uses the
standard deviation of active returns as a measure of risk instead of the
standard deviation of the portfolio.
None of our return gives a positive return according to the risk of the
standard deviation.
Hypothesis
We accept our H1 and H2 hypothesis

Conclusion
A mutual fund is a collective investment scheme, which specializes in
investing a pool of money collected from investors for the purpose of
investing in securities such as stocks, bonds, money market instruments and
similar assets. One of the main advantages of mutual funds is that they give
small investors access to professionally managed, diversified portfolios of
equities, debt instruments i.e. TFCs and Govt. Securities and other securities,
which otherwise would be quite difficult (if not impossible) to create with a
small amount of capital.
To study the performance of mutual funds in Pakistan and their performance
of mutual funds with respect to different performance attributes.
This project report provides Future of Mutual Funds industry information as
well as awareness level amongst people for Mutual Funds.
We accept our H1 and H2 hypothesis
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The study gives an outlook to management as to how the mutual funds are
performing in the current market situation as a result what may be the future
of this industry. It suggest the management that how many persons are
aware of the mutual funds & what type of mutual funds & other investment
channel they prefer in current Mkt. situation.
This study also is very informative the students who want to understand and
undertake assignments in the industry. This study also facilitates the general
people who can understand the importance and explore the new option for
investment.
In trenyor ratio, five of our fund gives positive ratios as per market risk. JS
Income fund gives the highest ratio of return than the risk in the market and
the HBL income fund is highly effected by market risk at it is the negative
return.
In sharp ratio, only four of the funds give positive ratio against the risk fund
is facing.
In sortino ratio, only three funds are efiicient against risk. And they gives
excessive return than the minimumal acceptable return.
In information ratio, none of our return gives a positive return according to
the risk of the standard deviation
Limitation and recommendation
The data taken was of very few period time.
It doesnot consider other risk in the market like size, value and unsystematic
risk.
Historical return pattern has not been considered
Comparison cannot be made on the bases of only expected returns
Other cost like transaction cost, taxes and inflation rate has not been
included
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added,
if any, of active portfolio management. It is a ranking criterion only. A ranking
of portfolios based on the Treynor Ratio is only useful if the portfolios under
consideration are sub-portfolios of a broader, fully diversified portfolio. If this
is not the case, portfolios with identicalsystematic risk, but different total
risk, will be rated the same. But the portfolio with a higher total risk is less
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diversified and therefore has a higher unsystematic risk which is not priced in
the market.
An alternative method of ranking portfolio management is Jensen's alpha, which
quantifies the added return as the excess return above the security market
line in the capital asset pricing model. As these two methods both determine
rankings based on systematic risk alone, they will rank portfolios identically.
All of the information used in ratio analysis is derived from actual historical
results. This does not mean that the same results will carry forward into the
future. However, you can use ratio analysis on pro forma information and
compare it to historical results for consistency.
If the rate of inflation has changed in any of the periods under review, this
can mean that the numbers are not comparable across periods.
It can be quite difficult to ascertain the reason for the results of a ratio
It can be dangerous to conduct a ratio analysis comparison between two
firms that are pursuing different strategies

References:
http://www.jiit.ac.in/uploads/Synopsis_SwetaGoel.pdf
http://mufap.com.pk/pdf/WRMF.pdf
http://www.slideshare.net/kalashsh/mutual-funds-in-pakistan
http://www.scribd.com/doc/31412111/Mutual-Fund-in-Pakistan-Types-andPerformance-Evaluation#scribd
http://www.allprojectreports.com/MBA-Projects/Finance-ProjectReport/project-report-mutual-funds/Project-Report-Mutual-Funds.htm

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