A mutual fund is a pool of money belonging to a group of investors entrusted to a Fund Manager hired by the group. The Fund Manager invests the money on behalf of the investors. A management fee is paid to Fund Manager by the investors. If there is a profit or gain on investments, it belongs to the investors. In case of loss, it is also bear by the investors. The types of mutual funds:

Open-End Fund

In Pakistan Mutual Funds were introduced in 1962, when the public offering of National Investment (Unit) Trust (NIT) was introduced which is an open-end mutual fund. In 1966 another fund that is Investment Corporation of Pakistan (ICP) was establishment. ICP subsequently offered a series of closed-end mutual funds. Up to early 1990s, twenty six (26) closed-end ICP mutual funds had been floated by Investment Corporation of Pakistan. After considering the option of restructuring the corporation, government decided to wind up ICP in June, 2000. In 2002, the Government started Privatization of the Investment Corporation of Pakistan. 25 Out of 26 closed-end funds of ICP were split into two lots. There had been a competitive bidding for the privatization of funds. Management Right of Lot-A comprising 12funds was acquired by ABAMCO Limited. Out of these 12, the first 9 funds were merged into a single closed-end fund and that was named as ABAMCO Capital Fund, except 4th ICP mutual fund as the certificate holders of the 4th ICP fund had not approved the scheme of arrangement of Amalgamation into ABAMCO capital fund in their extra ordinary general meeting held on December 20, 2003. The fund has therefore been reorganized as a separate closed-end trust and named as ABAMCO Growth Fund. Rest of the three funds were merged into another single and named as ABAMCO Stock Market Fund. So far as the Lot-B is concerned, it comprised of 13 ICP funds, for all of these thirteen funds, the Management Right was acquired by PICIC Asset Management Company Limited. All of these thirteen funds were merged into a single closed-end fund which was named as PICIC Investment Fund. Later on the 26th fund of ICP (ICP-SEMF) was also acquired by PICIC Asset Management Company Limited. The certificate holders in extraordinary general meeting held on June 16, 2004 approved the reorganization of SEMF into a new closed-end scheme renamed as PICIC Growth Fund. The Securities and Exchange Commission of Pakistan subsequently authorized PGF on July 30, 2004. Initially there was both public and private sector participation in the management of these funds, but with the nationalization in the seventies, the government role become more dominant. Later, the government also allowed the private sector to establish mutual funds Mutual Funds marched on the road to recovery during the period July December, 2009 with net assets showing an increase of 42%, i.e. increasing from Rs. 182 billion in January, 2009 to Rs. 258 billion in December, 2009. The total number of mutual funds stood at 116 in December, 2009 compared to 95 in January, 2009 substantiating an uptrend in the industry both in terms of growth in net assets as well as number of mutual funds launched. Growth was primarily evidenced in the categories of money market, income, and capital-protected funds. This shift, however, was anticipated especially keeping in view the fact that appetite towards risk had subdued in the aftermath of the crisis that entangled the industry in late 2008, effects of which carried forward till the first half of 2009. The net assets of the mutual fund industry amounted to Rs. 253 billion, as on 28th February 2010 as compared to Rs. 258 billion in December,2009.The total number of mutual funds stood at 121 as at March 31,2010 compared to 116 in December, 2009 substantiating marginal growth in the number of mutual funds launched. Despite the unprecedented financial turmoil, mutual fund industry in general withstood the down turn.

Purpose of study

The proposed study is aimed to study the performance comparison of mutual funds (Equity & Money Market) in Pakistan. Moreover, the beneficiaries for the proposed study would be the fund managers and the investors.

Conceptual Framework

S.M. Aamir Shah & Syed Tahir Hijazi (2005) carried out a research to investigate the mutual funds risk adjusted performance using performance evaluation methods. In Pakistan, people avoid interest-based conventional schemes of investment. If alternative schemes are provided which are religiously permissible can boost up savings in the country and mutual funds can offer such opportunity.

Eleni Thanou (2008) has utilized the methods and models for the evaluation of 17 Greek Equity funds, for a period of nine years. It shows that mutual funds evidenced satisfactory diversification and mutual funds followed market as well. The timing ability of the fund managers is negative or non-existent.

Athanasios G. Noulas, John A. Papanastastion & John Lazaridis (2005) discussed that how performance of mutual funds is evaluated. The evaluation of Greek Equity funds are discussed by the authors. The evaluation is based on the analysis of risk and return. The risk is measured through the coefficient of variation and the systematic risk. The study shows that there is positive relation between risk and return and betas for all funds are smaller than one.

Professor George P. Artikis (2003) evaluate the performance of ten domestic balanced mutual funds operating in Greece for the duration of 1/1/1995 to 31/12/1998. The sample mutual funds were ranked on the basis of their co-efficient of variation, return, total risk and systematic risk. The techniques used in this research were Treynor, Sharpe and Jensen. The result shows that ten mutual funds achieved lower return than the General Index of the ASE (Athens Stock Exchange). However, the mutual funds achieved satisfactory return in relation to the total and systematic risk undertaken.

Antti Pellinen, Kari Tormakangas, Outi Uusitalo, Anu Raijas (2010) carried out a research for further understanding of the financial capability of mutual fund investors, and compare branch office and internet investors. It tries to examine mutual fund investor’s awareness and abilities of the terms and risks of mutual fund investments using a new measurement instrument.

James L. Davis (2001) analyzed the relationship between equity mutual fund performance and manager style. He addressed the two questions. First, does any investment style generate abnormal returns on average? Second, when funds are grouped by equity style, does any style exhibit performance persistence?

The answers from his study are as follows: None of the styles earned positive abnormal returns during the sample periods of 1965 to 1998, and value funds realized negative abnormal returns of about 2.75 percentage. Some evidence was found of short-run performance persistence among the best-performing growth funds and among the worst-performing small-cap funds.

Magnus Dahlquist, Stefan Engström, Paul Söderlind (2000) studied the relation between fund attributes and fund performance in the Swedish market. Performance is measured as the alpha in a linear regression of fund returns on several benchmark assets, allowing for time-varying betas. The estimated performance is then used in a cross-sectional analysis of the relation between attributes and performance of fund such as past performance, size, turnover, flows and proxies for expenses and trading activity. The results show that good performance occurs among low fee funds, small equity funds, funds whose trading activity is high and, in some cases, funds with good past performance.

S. P. Kothari and Jerold B. Warner (2001) had researched on standard mutual fund performance measures, using simulated funds whose characteristics mimic actual funds. They found that performance measures used in past mutual fund research have little ability to detect economically large magnitudes (e.g. three percent per year) of abnormal fund performance, particularly if a fund’s style characteristics differ from those of the value-weighted market portfolio. Power can be strongly improved, however, using event-study procedures that analyze a fund’s stock trades. These procedures are feasible using time-series data sets on mutual fund portfolio holdings.

Research Question

Proposed study is designed to answer that whether equity mutual funds are performing better than money market mutual funds if not then why?

Hypothesis

H0: Future performance is not guaranteed according to past performance of the funds.

H1: Fund cannot indicate the return performance of the fund unless risk factors are included.

Research Design

Research is design with the following the sample, variables and source of data and methodology for data analysis.

The Sample

The sample for the research consists of eighteen money market mutual funds and twenty seven equity mutual funds, which include eighteen open-end equity mutual funds and nine close-end equity mutual funds.

Variables

The variables for the performance comparison of the mutual funds were Beta of the funds return with the Market, Monthly Return, Net Asset Value, Return on Market, Return of Risk Free Assets and Risk Adjusted Performance.

Sources of Data

The data required for the research was collected from different sources. Risk free rate (Rf) was taken as 6 month T-Bill and Return on market (Rm) was calculated on the return of 1 Month Kibor Rates. The Net Asset Values of the funds were taken from the Business Recorder, Mutual Funds Association of Pakistan and respective websites of the funds. The data was collected from 2004 to 2010.