Mutual Fund Growth Analysis And Risk Minimization

Abstract

AbstractMutual fund is the most popular mode of investment at the stock market and its performance evaluation is a topic of immense interest for both investors and academics. This paper provides an overview of the Pakistani Mutual Fund industry and investigates the mutual funds risk adjusted performance using pertinent performance evaluation models. The focus of the study is on open end mutual funds consisting of equity, income, balanced, Islamic equity, asset allocation and money market funds.Mutual fund industry in Pakistan is still in developing phase. The investors adopt a conservative approach as is evident from the beta derived in the research paper. This paper examines the performance of mutual funds over the span of five years using Sharpe and Treynor models to analyze portfolio performance and investigates the relationship between the mutual funds and market portfolio (KSE 100 Index). The paper further focuses on the critical ratios relevant to mutual funds namely net asset value, number of shares outstanding, return per unit of risk, standard deviation and beta as risks measure.The paper proceeds as follows: Section 1 gives Introduction, Section 2 indicates the Objective, Section 3 provides Theoretical background information. Section 4 presents Literature review on empirical studies, Section 5 contains Research Statement, Section 6 states the Research Methodology used in the analysis while Section 7 pertains to computational Analysis of the Models. Section 8 summarizes the Result, Section 9 contains Limitation of the study and Section 10 concludes the research.On an overall basis funds industry has outperformed the market proxy by 0.86 percent, indicating defensive investment by the investors. Pakistan's Mutual Fund industry has a Sharpe ratio of 0.475 as compared to market risk premium of 0.27 per one percent of standard deviation and Treynor ratio is 0.471. The result also identifies some of the funds that have underperformed.Hence overall results suggest that mutual funds industry has growth potentials even though some of the funds have underperformed due to inherent problem of non-diversification.Key words: Sharpe ratio, Treynor ratio, Risk measurement, Bench mark, Beta.