MUTUAL FUNDS - RISK AND RETURN PERSPECTIVES

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MUTUAL FUNDS
RI S K AN D RE T U R N PE R S P E C T I V E S
B A S I C R E S E A R C H
Instructor
DR. SHABIB HAIDER
Prepared By:
MUSTANSIR SHABBAR
ROLL NO. 072264
MPA PREVIOUS FINAL (FINANCE)
JANUARY – JUNE 2009
DEPARTMENT OF PUBLIC
ADMINISTRATION
UNIVERSITY OF KARACHI

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TABLE OF CONTENTS
ACKNOWLEDGEMENT………….………………………………………………………….3
CHAPTER I – BACKGROUND OF STUDY………….………………………….4
INTRODUCTION ....................................................................................................... 5
OBJECTIVE ............................................................................................................. 6
SIGNIFICANCE OF THE STUDY................................................................................... 7
SCOPE AND LIMITATIONS ......................................................................................... 7
ASSUMPTIONS ........................................................................................................ 8
DELIMITATION ......................................................................................................... 8
Chapter II – Literature Review………………………………………...9
MUTUAL FUNDS AS AN ECONOMIC MOBILIZER ......................................................... 10
MUTUAL FUNDS DISCLAIMER ................................................................................................... 11
MUTUAL FUNDS CHARACTERISTICS ......................................................................................... 11
ADVANTAGES AND DISADVANTAGES ........................................................................................ 12
MUTUAL FUNDS CATEGORIES .................................................................................................. 14
MUTUAL FUNDS FOR HOUSEHOLD INDIVIDUALS ..................................................................... 16
MUTUAL FUNDS FOR INSTITUTIONS ......................................................................................... 17
MUTUAL FUNDS IN PAKISTAN ................................................................................. 17
MUTUAL FUNDS YIELD .............................................................................................................. 19
MUTUAL FUNDS GROWTH AND INCENTIVES ............................................................................ 20
UNDERSTANDING MUTUAL FUNDS RISK .................................................................. 22
RISK CATEGORIES ..................................................................................................................... 23
KEY STATISTICS FOR SCREENING MUTUAL FUNDS……...…………………….25
A. MUTUAL FUNDS RETURNS ................................................................................. 26
1. ABSOLUTE RETURNS ........................................................................................................ 26
2. ANNUALIZED RETURNS ..................................................................................................... 26
3. MONTHLY RETURNS .......................................................................................................... 27
4. ANNUAL / YEARLY RETURNS ............................................................................................ 28

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5. PAYOUT OR DISTRIBUTION ............................................................................................... 29
B. MUTUAL FUNDS RISK ........................................................................................ 29
1. DURATION .......................................................................................................................... 30
2. STANDARD DEVIATION: ..................................................................................................... 32
3. ACTIVE RETURN OR ALPHA .............................................................................................. 33
4. BETA .................................................................................................................................. 35
5. R-SQUARED ....................................................................................................................... 36
C. MUTUAL FUNDS PERFORMANCE......................................................................... 37
1. RISK-ADJUSTED RETURN – RAR ..................................................................................... 38
2. COEFFICIENT OF VARIATION – CV ................................................................................... 40
3. SHARPE RATIO .................................................................................................................. 41
4. TREYNOR RATIO ................................................................................................................ 42
5. JENSEN’S ALPHA ............................................................................................................... 44
6. INFORMATION RATIO – IR ................................................................................................. 45
D. NON-QUANTITATIVE RISK ASSESSMENTS ........................................................... 47
1. SELF-ASSESSMENT OF RISK ............................................................................................ 47
2. RISK MANAGEMENT PROCEDURES .................................................................................. 47
Chapter III – Summary………………..……………………………………………….49
CONCLUSION........................................................................................................ 50
RECOMMENDATIONS ............................................................................................. 52
BIBLIOGRAPHY ..................................................................................................... 54
ABBREVIATIONS ................................................................................................... 57
APPENDICES ........................................................................................................ 59

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ACKNOWLEDGEMENT
I thank to the Almighty Allah for giving me strength, courage, patience and
inspiration to complete this Research Report.
I am also very sincerely grateful for the efforts of those who have
contributed to the successful completion of this piece of work. I am
especially thankful to my course coordinator Dr. Shabib Haider for his
guidance, help, advice and encouragement that led to the successful
completion of this report.
I am also very much thankful to my company Dawood Capital
Management Limited and its executives and colleagues for their precious
time given to me for discussion and research materials provided to me.
On the basis of the contributions to this report, it is necessary to list the
names of persons who have provided me guidance in completion of this
report. I am very much thankful to:
1. Mr. Jamal Tariq, Assistant Manager Research, Alfalah Securities
Limited, Mutual Funds Distribution Section.
2. Mr. Adeel Durrani, Mutual Funds Research Analyst, Atlas Capital
Markets (Pvt.) Limited.
Last but not least, I must appreciate the efforts of all respondents including
employees of MUFAP, Asset Management Companies, Research Firms
and Investment Facilitators who have supported me in my research.
Mustansir Shabbar
MPA Previous Final – Finance
July 2007 – June 2009
Evening Program

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CHAPTER I
BACKGROUND OF STUDY

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INTRODUCTION
A mutual fund is a collective investment scheme, which specializes in investing a
pool of money collected from many investors for the purpose of investing in
securities such as stocks, bonds, money market instruments and similar assets.
It is indirect mode of investing. There are two types of mutual funds by structure,
open end and closed end. In Pakistan mutual fund is constituted as a trust. It has
a Trustee, Sponsor, Asset Management Company (AMC), Registrar and
Custodian. Fund is established by Sponsors. Trustee holds the property of the
fund in its custody for the benefit of the investors and hence acts as a custodian
as well. Registrar keeps the data of all the investors either electronically or on
paper. AMC is approved by Securities and Exchange Commission of Pakistan
(SECP) being a regulator and all investment will be done in a fund according to
the guidelines provided by the SECP.
Mutual funds are the most popular method of indirect investing around the globe.
Mutual funds have a vital role in the economy of the county. Globally it is
considered as a great booster in the capital formation of any country. The history
of mutual fund probably began in 1924 when the very first mutual fund was
created by three Boston securities executives when they pooled their money
together to form Massachusetts Investor Trust. Today in the US there are over
10,000 mutual funds available. These mutual funds are collectively worth more
than 10 trillion dollars divided by 93 million investors. Almost every individual in
US invests in the mutual funds to utilize his/her idle money to generate healthy
returns according to his/her risk appetite. Almost every commercial bank in the
western countries provide their account holders to invest in the mutual funds
through their accounts in the form of IRAs (Individual Retirement Accounts), in
fact, every commercial bank owns a some kind of mutual fund to cater the needs
their clients. It shows how much popular and useful tool mutual funds are for the
economy of the western countries.
Mutual funds have a very important role in the economy of Pakistan as well. In
Pakistan mutual fund started in 1966 with the establishment of National
Investment Trust (NIT). But actual mutual funds gained its popularity after 2003
and now we have about 28 AMCs offering about 120 different kinds of mutual
funds (both open and closed end) depending upon the investors needs. Mutual
funds are our one of the major sources of employment as thousands of people

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are engaged with this industry. In Pakistan all AMCs have jointly created a body,
MUFAP (Mutual Funds Association of Pakistan) in order to safeguard the interest
of the AMCs and to ensure a healthy market for their smooth operations.
It does not only provide a good investment alternative to the investors at grass
root levels but also fuels the economy by providing necessary capital from
surplus agents to deficit agents. They are also one of the major sources of
employment as well. The major advantages of mutual funds are:
1. Diversification
2. Reduced transaction cost
3. Tax free returns
4. Risk Reduction
Risk and reward are the part and parcel of every investment. Every investment
involves certain level of risk related to its reward. Without risk the life would be
very easy. Investment decision would no longer required prior analysis and only
few financial instruments and analytical methods would exist. But risk in inherent
in every financial security, so the mutual funds. Every investor has to decide on
his/her risk tolerance i.e. how much risk they are willing to incur to generate
maximum returns on investment. No investors can expect more returns without
assuming greater risk and if any one who is not willing to incur risk must be
satisfied with risk free rate of return.
Mutual funds have their own unique kinds of risks associated with their
investments policies and objectives. It is difficult to quantify the risk of a particular
security and very difficult to quantify the risk of the entire portfolio. Various
analytical and mathematical tools are available to measure the risk of a mutual
fund portfolio which will be explored in the report.
OBJECTIVE
The goal of this study to enhance the knowledge about the importance of mutual
funds with reference to risk and return perspectives. Different models will be
presented to calculate the return as well as the risk associated with them.

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SIGNIFICANCE OF THE STUDY
This study will provide useful information about the mutual funds as an excellent
investment tool which is not only used in our economy but globally it serves as a
common way to generate returns to beat the inflation rate.
SCOPE AND LIMITATIONS
i) This study will cover the analysis of the data of the open end mutual funds
operating in Pakistan.
ii) The data will be available through publications by AMCs on monthly basis
and by MUFAP.
iii) The study includes fixed-income / money market and stock funds (till June
2008, no proper boundaries were defined for fixed-income / money market
funds).
iv) Mutual funds having a complete track record in their category during the last
three years from July 2005 to June 2008. The reason is that during this
tenure, the AMC industry had shown a great improvement not in terms of
returns but in terms increased assets under management as well.
v) Only pure categories will be included i.e. money market / fixed-income and
stock based funds.
vi) Only conventional funds are included, because Islamic funds market is still
very nascent and started to grow during 2007 and no adequate data is
available for proper research.
vii) Following funds are included in the study:
A. Money Market / Fixed-Income Funds
a) Dawood Money Market Fund – DMMF
Managed by Dawood Capital Management Limited – DCM Ltd.
b) Pakistan Income Fund – PIF
Managed by Arif Habib Investments Management Ltd. – AHIML
c) United Money Market Fund – UMMF
Managed by UBL Fund Managers – UBLFM
d) JS Income Fund – JSIF
Managed by JS Investments Limited – JSIL
e) Atlas Income Fund – AIF
Managed by Atlas Asset Management Limited – AAML

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B. Stock Funds
a) National Investment Trust – NIT
Managed by National Investment Trust – NIT
b) Pakistan Stock Market Fund – PSM
Managed by Arif Habib Investments Management Ltd. – AHIML
c) Atlas Stock Market Fund – ASMF
Managed by Atlas Asset Management Limited – AAML
d) Crosby Dragon Fund – CDF
Managed by Crosby Asset Management - CAM
ASSUMPTIONS
i) Facts and figures presented in the research reports and publications
are true.
ii) Analysis provided is solely based on the analyst view point which may
include his/her subjectivity about the market conditions.
iii) The data and investors’ perception may change during the preparation
of this report.
DELIMITATION
Following will not be included in the research:
i) Funds that have the mixture of two or more categories.
ii) Data before July 2005 and after June 2008.
iii) Changes in the circumstances and methodologies after June 2008.
iv) Changes in the regulations that govern the financial markets.
v) Any changes occurred during the preparation of the report.

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CHAPTER II
LITERATURE REVIEW

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MUTUAL FUNDS AS AN ECONOMIC MOBILIZER
The success story of any economy can only scripted on the basis of sound
financial system. During the last century mutual funds emerged as an
indispensable tool for stabilizing the economy; and mobilizing and channelizing
the savings of millions of individuals and institutions. Today mutual funds are
playing significant role in providing financial services in the financial industry
throughout the World. The successful economies of developed western countries
including USA and other European countries have trillions of dollars invested in
mutual funds. Approximately every individual in US invests in mutual funds. Also
our neighbor India has more than 800 billion of dollars invested in mutual funds
which is considered as the largest market of Asia and there is a prediction that it
will cross $1 trillion up to 20151
.
Investors can invest directly by buying and selling securities by themselves,
typically through their own brokerage accounts. They have direct control over
them. They have wide varieties of securities available to choose. But investing
directly requires extensive knowledge of financial markets which a common
person does not have. For them, indirect investing is the best option. It involves
leaving the investment decisions to others, technically to professional experts.
Mutual funds are the best available option for indirect investing, which offers
professional fund managers to manage the portfolio of securities on behalf of
investors.
A mutual fund is a company that pools money from many investors and invests
the money in stocks, bonds, short-term money-market instruments, other
securities or assets, or some combination of these investments. The combined
holdings the mutual fund owns are known as its portfolio. Each share represents
an investor's proportionate ownership of the fund's holdings and the income
those holdings generate2
.
Purchasing a mutual fund which holds a portfolio of securities is to purchase an
ownership interest in that portfolio of securities. Investors are entitled to a pro
rata share of dividends, interest and capital gains generated. Investors must also

1
Rao, P. Hanumantha and Mishra, Vijay Kr., “Mutual Fund: A Resource Mobilizer in Financial Market”, in
Vidyasagar University Journal of Commerce, Vol. 12, March 2007, p. 111.
2
Invest Wisely: An Introduction to Mutual Fund, U.S. Securities and Exchange Commission,
http://www.sec.gov/investor/pubs/inwsmf.htm.

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pay a pro rata share of the company’s expenses and its management fee, which
will be deducted from the portfolio’s earnings as it flows back to the investors1
.
American investors increasingly have turned to mutual funds to save for
retirement and other financial goals. Mutual funds can offer advantages of
diversification and professional management. But, as with other investment
choices, investment in mutual funds involves risk. And fees and taxes will
diminish a fund’s returns. It pays to understand both the upsides and the
downsides of mutual funds investing and how to choose products that match
your goals and tolerance of risk2
.
MUTUAL FUNDS DISCLAIMER
U.S. SEC on his website published several educational literatures for investors’
education and learning. It has stated few key points to remember for mutual
funds investing:
i) Mutual funds are not guaranteed by FDIC or any other governmental
agency – even if you buy through a bank and the fund carries the
bank’s name. You can lose money investing in mutual funds.
ii) Past performance is not a reliable indicator of future performance. So
do not be dazzled by last year’s high returns. But past performance
can help you assess a fund’s volatility over time.
iii) All mutual funds have costs that lower your investment returns. Shop
around, and use a mutual fund cost calculator at
www.sec.gov/investor/tools.shtml to compare many of the costs of
owning different funds before you buy.
MUTUAL FUNDS CHARACTERISTICS
Some of the traditional and distinguishing characteristics of open end mutual
funds include the following:

1
Jones, Charles P. (2005‐06), Investments Analysis and Management, 10th
edition, California, p. 50.
2

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Investors purchase shares from the fund or investment company itself (or
through a broker for the fund) instead of from other investors on a
secondary market.
The price that investors pay for mutual fund shares is the fund's per share
net asset value (NAV) plus any shareholder fees that the fund imposes at
the time of purchase (such as sales loads).
Mutual funds generally create and sell new shares to accommodate new
investors. In other words, they sell their shares on a continuous basis to
new investors. There is no limit on their capitalization and keeps on
changing every day.
Mutual fund shares are also "redeemable," meaning existing investors can
sell their shares back to the fund or investment company at any time.
The investment portfolios of mutual funds typically are managed by
separate entities known as "investment advisers" that are registered with
the SEC (Regulator).
ADVANTAGES AND DISADVANTAGES
Every investment has advantages and disadvantages. But it's important to
remember that features that matter to one investor may not be important to
another. Whether any particular feature is an advantage for one will depend on
one’s unique circumstances. For some investors, mutual funds provide an
attractive investment choice because they generally offer the following features1
:
Professional Management — Professional money managers research, select,
and monitor the performance of the securities the fund purchases.
Diversification — Diversification is an investing strategy that can be neatly
summed up as "Don't put all your eggs in one basket." Spreading your
investments across a wide range of companies and industry sectors can help
lower your risk if a company or sector fails. Some investors find it easier to
achieve diversification through ownership of mutual funds rather than through
ownership of individual stocks or bonds.

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Affordability — Some mutual funds accommodate investors who don't have a
lot of money to invest by setting relatively low amounts for initial purchases,
subsequent monthly purchases, or both.
Liquidity — Mutual fund investors can readily redeem their shares at the current
NAV — plus any fees and charges assessed on redemption — at any time.
But mutual funds also have features that some investors might view as
disadvantages, such as:
Costs Despite Negative Returns — Investors may have to pay sales charges,
annual fees, and other expenses regardless of how the fund performs. And,
depending on the timing of their investment, investors may also have to pay
taxes on any capital gains distribution they receive — even if the fund went on to
perform poorly after they bought shares.
Lack of Control — Investors typically cannot ascertain the exact make-up of a
fund's portfolio at any given time, nor can they directly influence which securities
the fund manager buys and sells or the timing of those trades.
Price Uncertainty — With an individual stock, you can obtain real-time (or close
to real-time) pricing information with relative ease by checking financial websites
or by calling your broker. You can also monitor how a stock's price changes from
hour to hour — or even second to second. By contrast, with a mutual fund, the
price at which you purchase or redeem shares will typically depend on the fund's
NAV, which the fund might not calculate until many hours after you've placed
your order. In general, mutual funds must calculate their NAV at least once every
business day, typically after the major exchanges close.
Despite few disadvantages, investors in U.S. other European countries choose to
invest with mutual funds more aggressively especially household investors
because their advantages have overcome their disadvantages in long run. Now
mutual funds have are of first choice of them when it comes to investing.
Now it is concluded that when it comes to investing, most of the western
household investors opt for mutual funds. But investors have literally thousands

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of choices. Before you invest in any given fund, decide whether the investment
strategy and risks of the fund are a good fit for you. The first step to successful
investing is figuring out your financial goals and risk tolerance — either on your
own or with the help of a financial professional. Once you know what you are
saving for, when you will need the money, and how much risk you can tolerate,
you can more easily narrow your choices.
MUTUAL FUNDS CATEGORIES
Mutual funds are generally categorized broadly in the following:
Money Market Mutual Fund
Equity (Stock) Fund
Bond Fund
Hybrid (Balanced) Fund
Money market fund invests in short-term high quality investments issued by the
government, corporations, local governments and municipalities. Money market
funds are appealing to the investors for the following reasons:
No sales and redemption charges
Average maturity ranges from 1-3 months, thus providing liquidity
Any time redeemable (being and open end)
Interest earned which is ongoing in the market
Interest is credited on daily basis
Diversification and professional management
Safety of capital
Equity (stock) fund invests in the stocks of the companies. They are highly risky
and volatile as their value rise and fall very quickly depending on the
performance of the stock market. Equity funds are generally divided into two
categories based on their approach to selecting stocks1
:
Value fund generally seeks to find stocks that are cheap on the basis of
standard fundamental analysis yardsticks, such as earnings, book value
and dividend yield. They focus on dividends on the stocks.

1
Jones, Charles P. (2005‐06), Investments Analysis and Management, 10th
edition, California, p. 61.

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Growth funds, on the other hand, seek to find companies that are
expected to show rapid future growth in earnings, even if current earnings
are poor or, possibly, non-existent. They focus on large capital gain rather
than dividend.
Bond fund invests in bonds of issued by both Government and private
corporations. They are riskier than money market funds because they aim to
earn higher returns.
Hybrid (balanced) fund invests in the combination of stock and bonds thus
providing the combined features of both bond and stock funds.
Thinking about your long-term investment strategies and tolerance for risk can
help you decide what type of fund is best suited for you.
Investors can earn money from mutual funds in three ways:
1. Dividend Payments — A fund may earn income in the form of dividends
and interest on the securities in its portfolio. The fund then pays its
shareholders nearly all of the income (minus disclosed expenses) it has
earned in the form of dividends.
2. Capital Gains Distributions — The price of the securities a fund owns
may increase. When a fund sells a security that has increased in price, the
fund has a capital gain. At the end of the year, most funds distribute these
capital gains (minus any capital losses) to investors.
3. Increased NAV — If the market value of a fund's portfolio increases after
deduction of expenses and liabilities, then the value (NAV) of the fund and
its shares increases. The higher NAV reflects the higher value of your
investment.
With respect to dividend payments and capital gains distributions, funds usually
will give you a choice: the fund can send you a check or other form of payment,

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or you can have your dividends or distributions reinvested in the fund to buy
more shares (often without paying an additional sales load)1
.
MUTUAL FUNDS FOR HOUSEHOLD INDIVIDUALS
Investment Company Institute Face Book 2009Mutual funds in are not only the
source for employment but majority of the households in opt for mutual funds for
their various needs including savings and investment, retirement plans and
education. They are so easy to invest that an individual can get a direct access to
any investment company and can invest with them without any hassle. The
literature provided by them is also very easy to understand.
Table 1: Investment Company Institute Face Book 2009, p. 149.

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MUTUAL FUNDS FOR INSTITUTIONS
They provide efficient tool for institutions including nonfinancial institutions for
cash management and alternative investment vehicle for both short-term and
long-term. Huge portions of employers managed retirement plans are invested
with mutual funds. Financial advisors of investment companies provide advisory
services and suggesting strategies to a large number of households to meet
financial goals.
MUTUAL FUNDS IN PAKISTAN
Mutual funds in underdeveloped countries like in Pakistan are still in its
developmental phase and the market is very nascent unlike Americas where they
are at their peak. In Pakistan, investment companies depend largely on the
institutional money and very small number of household is investing with them.
Households who have invested are majority related to these financial institutions
itself or they are highly educated.
Mutual funds have a very important role in the economy of Pakistan as well. In
Pakistan mutual fund started in 1962 with the establishment of National
Investment Trust (NIT) and public offering of NIT which is an open end fund. In
1966 another company Investment Corporation of Pakistan (ICP) was
established which offered a series of 26 closed end mutual funds. In 2002,
government started the privatization of ICP and ABAMCO Limited acquired 12
funds of ICP (ABAMCO was later acquired by Jahangir Siddiqui & Company).
Rest of the funds were acquired by PICIC Asset Management Company Limited.
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. Currently there are more than 120 mutual funds with 28
AMCs at the end of Financial Year 2008.
In the last few years mutual fund industry has shown significant progress with
reference to saving mobilization and important part of the overall financial
markets. But still we are far behind the developed countries mutual fund industry.
Growth in mutual funds worldwide is because of the overall growth in both the

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size and maturity of many foreign capital markets. These nations have
increasingly used debt and equity securities rather than bank loans to finance
economic expansion. The Pakistan economy can prosper because of the
benefits of new investment opportunities arising from economic reform,
privatization, lowered trade barriers and rapid economic growth1
.
Individuals throughout the world have the same basic needs that are education
for their children, health, good living standard and comfortable retirement. In our
country where people are religious minded, mostly they avoid bank schemes for
investments, if they are provided an investment opportunity which suits the
religion, we can mobilize savings from masses which may be laying an idle
money at present. By doing so we would be able to improve the living standard of
our countrymen through economic prosperity. This can be achieved through the
introduction of different species of mutual funds and their performance. The
success of this sector depends on the performance and the role of regulatory
bodies. Excellent performance and stringent regulations will increase the
popularity of mutual funds in Pakistan2
.
Considering the customs of the people of Pakistan, State Bank of Pakistan
allowed Islamic Banking Services to various bankers which also lead to the
establishment of Islamic Mutual Funds. SECP has given and is still giving
licenses to the AMCs to carry out Shariah Compliant investment advisory
services in the form of Islamic Mutual Funds and currently Islamic mutual funds
industry is equally competing with the conventional industry in categories.
SECP in its Circular No. 07 of 2009 ref: NBFCD/MF/CIRCULAR/2009/292 in
consultation with Mutual Funds Association of Pakistan (MUFAP) had devised
the following categories for the open end schemes:
1. Equity Scheme
2. Balanced Scheme
3. Asset Allocation Scheme
4. Fund of Funds Scheme
5. Shariah Compliant (Islamic) Scheme

1
Aamir Shah, S.M. and Hijazi, Syed Tahir, “Performance Evaluation of Mutual Funds in Pakistan”, in The
Pakistan Development Review 44:4 Part II, Winter 2005, p. 865.
2
Aamir Shah, S.M. and Hijazi, Syed Tahir, “Performance Evaluation of Mutual Funds in Pakistan”, in The

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6. Capital Protected Scheme
7. Index Scheme / Index Tracker Scheme
8. Money Market Scheme
9. Income Scheme
10.Aggressive Fixed Income Scheme
MUTUAL FUNDS YIELD
Mutual funds are higher yielding alternatives than bank accounts and other
government savings schemes and extremely liquid – anyone can withdraw
his/her money anytime without penalty with just 3-6 days notice. They are
available in low-medium-high risk profiles depending on the investors risk
tolerance and their short-term and long-term objectives.
Mutual funds by law have to distribute over 90% of their profits to investors in
order to get tax advantages. Investors in banks only get as small share in their
contribution to economic growth. Investors in mutual funds, however, get the full
fruit of all profits made. Following table shows the payout results of financial year
2008 of 65 open end funds including both conventional and Islamic:
Fund Category Total
(PKR)
% of
Category
% of
Total
Count
Income / Money Market Funds
Conventional 199.19 95% 48% 24
Islamic 11.46 5% 3% 4
Total 10.65 100% 51% 28
Equity Funds
Islamic 20.75 15% 5% 4
Total 35.15 100% 32% 18
Hybrid Funds
Islamic 15.14 21% 4% 6
Total 70.76 100% 17% 19
Payout Grand Total 4 16.56 65
Table 2: DCM Research
Fund Category Total % of
Total
Count
Conventional 369.21 89% 51
Islamic 47.35 11% 14
Payout Grand Total 416.56 100% 65
Table 3: DCM Research

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Above tables show that the market for Islamic mutual funds is still very small and
nascent as compared to the conventional funds and needs more accent. It also
shows a lot of room available for Shariah Compliant products if focused properly.
Investment in a mutual fund not only offers benefits to the saver, but also the
corporate sectors. The fund, money market or equity, can help the corporate
sector meet its financing needs, and in the process pass the benefits along to
their investors.
MUTUAL FUNDS GROWTH AND INCENTIVES
For the above reasons the asset under management were increased in mutual
funds as compared to percentage of bank deposits every year (figure 16). After
2007, it was declined in June 2008 and December 2008 due to the financial crisis
and households including institutions withdrew money from the mutual funds in
bulk amounts. It was followed by the freeze of the stock market which locked up
the liquidity of the investors and they had no choice except to redeem their
holdings from the mutual funds to meet their liquidity requirements.
Figure 1: SBP Economic Data and DCM Research
Further, mutual funds have many tax benefits that appeal to high income
earnings since individuals gain a tax credit for the amount they invest in mutual
funds. Many mutual funds especially, money market funds offer very low
minimum amount of investment to start which encourages the investors of low
income brackets to go for mutual funds.
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Jun-2002 Jun-2003 Jun-2004 Jun-2005 Jun-2006 Jun-2007 Jun-2008
BankDepositsPKR.Billion
AUMas%ofBankDeposits
Open-End Mutual Fund v/s Bank Deposits
Bank Deposits Pkr. Bln. AUM as % of Bank Deposits

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Mutual funds have made a spectacular growth in the past three years. Asset
under management as on June 2002 were merely 25 billion which have
increased substantially over the years and as on June 2006, these stood at
Rs.175 billion, as on June 2008 Rs. 300 billion (USD 4 billion) and as at
December 2008 Rs. 175 billion (USD 2.1 billion)1
. There is a massive reduction
of approximately 40 percent, due to the financial crisis which hurt the mutual
funds the greatest. Compare this to India’s approximately USD 63 billion as at
December 20082
, we are a long way behind.
There are twenty eight Assets Management Companies/Investment Advisors
registered with Mutual Funds Association of Pakistan. These companies are
currently managing 121 open and closed end mutual funds. The private sector is
playing an increasingly prominent role in the sector and currently holds about 50
per cent of the total industry size. However, with the impeding privatization of NIT
(a public sector company) holding 50 per cent of the total industry size, the
mutual fund industry will become the exclusive domain of the private sector. This
moving of mutual fund industry into the private sector is a very healthy sign for
the future of the industry. It would boost its growth and new people will come into
the market which will be beneficial for its well being3
.
These days, the increasing innovation in products is helping to cater to the
requirements of all types of investors – risk averse, return orientated as well as
Shariah Complaint investors now having a large array of products to choose
from. However, the industry is still in the dire need of more or different products
in the market to address the different trends/preferences of the investors.
Moreover, the State Bank of Pakistan now allows mutual funds to invest 30 per
cent of their assets abroad or US $ 15 million (whichever is lower)4
. This initiative
will allow fund managers to diversify their portfolios which will mitigate risk and
enhance investor confidence in mutual funds5
.

1
MUFAP Sources, www.mufap.com.pk
2
2009, Investment Company Fact Book, 49th Edition, A Review of Trends and Activity in the Investment
Company Industry, p. 167
3
MUFAP , Country Report Pakistan 2007.
4
Ibid.
5
Ibid.

22
These days, the MUFAP is playing an active role in the promotion and growth the
industry. The governing regulator, SECP has setup a stringent regulatory
framework for the industry and with the recent amendments in the NBFC Rules
(Notified Entities Rules 2007), the regulator has become more vigilant in light of
the ever increasing number of mutual funds and asset management companies
coming into the market.
The mutual fund industry already meets stringent standards in terms of how
funds conduct their business. For example, it is mandatory for all assets
management companies and their funds to acquire a rating, while weekly
reporting of assets and liabilities of funds is also required. Moreover, the trustee
structure, governed by NBFC Rules 2003 and 2007, ensures that the custody of
all assets in the funds is held with the trustee on behalf of the investors. The
trustee structure provides yet another independent safeguard for the investors.
Despite the substantial progress made by Pakistan’s mutual funds industry
during the past 3-4 years and strong regulatory presence, Pakistan’s mutual
funds industry is still in the early stages of development. The industry still needs
to do a lot more to be able to attain a comparable position at least with the
mutual funds industry in India let alone those in the developed world.
UNDERSTANDING MUTUAL FUNDS RISK
Understanding of risk and return is the first and basic step towards investing.
Every investment involves certain degree of risk, so the mutual funds. They are
not free from risk. Although they are the useful tool to generate good returns on
investments as compared to others options available in the market with hassle
free investments, it definitely involves some degrees of risk as well. Before
investing in mutual funds, rational investors must decide on their risk tolerance
and financial condition and then choose the right category of mutual fund. It is
better to take advice from any financial advisor which the mutual fund company
offers to its clients.
Balancing risk and return is a dilemma that every investor faces. But armed with
the appropriate knowledge, quantitative tools and data, investors can maximize

23
their portfolio's return at the level of risk that is appropriate for them1
. The first
and broadly accepted concept of mitigating risk is diversification. Diversification
means not to put all eggs in one basket. All rational investors must hold fully
diversified portfolios to mitigate their aggregate risk associated. They more you
diversify, the less risky your portfolio will be.
RISK CATEGORIES
Risk can be categorized as Specific and Systematic.
Specific Risk is diversifiable risk also referred to as company-specific risk or
non-systematic risk. It is the aggregate risk that is specific to each company,
arising from such things as managerial expertise, R&D, patents, pending law
suits, labor relations, supplier relations, customer relations, etc. Specific risk also
includes micro economic factors specific to each industry that affect all firms in
an industry, such as seasonal fluctuations in demand and the prices of input
commodities2
.
Systematic Risk, non diversifiable risk, also known as market risk, consisting of
macro-economic factors such as inflation, war, fluctuating exchange rates, etc.,
cannot be diversified away and therefore is the residual risk that all investors are
faced with and must be factored into their balance between risk and return3
.
Investing in mutual funds involves following types of risks4
:
Call Risk. The possibility that falling interest rates will cause a bond issuer to
redeem—or call—its high-yielding bond before the bond's maturity date.
Country Risk. The possibility that political events (a war, national elections),
financial problems (rising inflation, government default), or natural disasters (an

1
Your Complete Guide to investing in Mutual Funds, http://www.investing‐in‐mutual‐funds.com/risk‐and‐
return.html#investment
2
Ibid.
3
Your Complete Guide to investing in Mutual Funds, http://www.investing‐in‐mutual‐funds.com/risk‐and‐
return.html#investment
4
The Financial Planning Center, Mutual Fund Risk, http://www.open‐
ira.com/Education_Center/3c_Mutual_Fund_Risk.htm

24
earthquake, a poor harvest) will weaken a country's economy and cause
investments in that country to decline.
Credit Risk. The possibility that a bond issuer will fail to repay interest and
principal in a timely manner. Also called default risk.
Currency Risk. The possibility that returns could be reduced for Americans
investing in foreign securities because of a rise in the value of the U.S. dollar
against foreign currencies. Also called exchange-rate risk.
Income Risk. The possibility that a fixed-income fund's dividends will decline as
a result of falling overall interest rates.
Industry Risk. The possibility that a group of stocks in a single industry will
decline in price due to developments in that industry.
Inflation Risk. The possibility that increases in the cost of living will reduce or
eliminate a fund's real inflation-adjusted returns.
Interest Rate Risk. The possibility that a bond fund will decline in value because
of an increase in interest rates.
Manager Risk. The possibility that an actively managed mutual fund's
investment adviser will fail to execute the fund's investment strategy effectively
resulting in the failure of stated objectives.
Market Risk. The possibility that stock fund or bond fund prices overall will
decline over short or even extended periods. Stock and bond markets tend to
move in cycles, with periods when prices rise and other periods when prices fall.
Principal Risk. The possibility that an investment will go down in value, or "lose
money," from the original or invested amount.

25
KEY STATISTICS FOR SCREENING MUTUAL FUNDS
When it comes to mutual fund investing, it requires proper screening and
comparison of mutual funds to figure out which one is worthy to be included in
the portfolio keeping in mind the risk tolerance. To screen out any mutual fund,
following key statistics should be followed:
A. Mutual Fund Returns
• Absolute Returns
• Annualized Returns
• Monthly Returns
• Annual / Yearly Returns
• Payout, Distribution, Dividend or Bonus
B. Mutual Funds Risk
• Duration
• Standard Deviation
• Active Return or Alpha
• Beta
• R-squared
C. Mutual Funds Performance
• Risk-Adjusted Return
• Coefficient of Variation
• Sharpe Ratio
• Treynor Ratio
• Jensen’s Alpha
• Information Ratio
D. Non-Quantitative Risk Assessment Approaches
• Self-Assessment of Risk
• Risk Management Procedures

26
A.MUTUAL FUNDS RETURNS
When we come to mutual funds comparison, mutual funds historic returns are the
first thing most of us look at, and it is what we are looking for. Mutual funds
historic returns are generally total returns which include all payouts and
distributions subtracting expense and charges such as load, management fee,
regulator fee, commissions and other expenses.
1. ABSOLUTE RETURNS
It is the return generated by the mutual fund in excess of its par NAV or starting
NAV. For example, if the starting NAV of the mutual fund is 100 and after certain
time period it rises up to 110, then 10 is the absolute increase and 10% is the
absolute return. It is generally used for stock based funds. It is calculated as:
After June 2008, MUFAP has introduced Morning Start formula for calculating
mutual funds returns. According to Morning Star, it is calculated as:
1
2. ANNUALIZED RETURNS
It is the return generated by the mutual fund in excess of its par NAV or starting
NAV annualized for the period or number of days. For example, if the starting
NAV of the mutual fund is 100 and after 180 it rises up to 105, then 5 is the
absolute increase and 10.13% is the absolute return (365 days a year). It is
generally used for money market / fixed-income funds. It can be calculated as:
365
.

27
According to Morning Star, it is calculated as:
.
1
3. MONTHLY RETURNS
Monthly return is the return generated by the mutual fund during the particular
month under study. It is a useful measure for the investors who are either short
term and use mutual funds for short term money parking or speculators who want
to gain the benefit of short term expected market fluctuations. It is calculated as:
365
.
Average Monthly Returns:
Funds 2006
%
2007
%
2008
%
Money Market / Fixed Income Funds (Annualized for 30 days)
DMMF 11.20 10.65 9.62
PIF 9.68 10.21 8.83
UMMF 8.99 9.81 8.87
UTPIF 10.87 9.73 9.16
AIF 10.94 9.79 9.05
Overall Average 10.34 10.04 9.11
Stock Funds (Absolute)
NIT 2.28 3.24 (0.39)
PSM 2.35 2.32 (0.04)
ASMF 2.49 2.66 (0.34)
CDF 1.40 4.51 3.08
Table 4: FMRs and DCM Research
1

28
.
1
4. ANNUAL / YEARLY RETURNS
Annual return is the return generated by the mutual fund after completion of its
financial year. It is the useful measure for investors having long term horizons at
least one year for their investments. Generally institutional investors consider
annual returns for evaluating mutual funds. It is calculated as:
365
.
Annual Returns:
Funds 2006
%
2007
%
2008
%
Money Market / Fixed Income Funds (Annualized for 30 days)
DMMF 11.77 11.18 10.06
PIF 10.11 10.70 9.06
UMMF 9.35 10.26 9.10
UTPIF 11.41 10.17 9.45
AIF 11.49 10.23 9.32
NIT 28.32 44.83 (6.82)
PSM 26.85 29.41 (3.01)
ASMF 31.49 29.39 (6.84)
CDF 15.09 62.55 35.10
1
.
1

29
5. PAYOUT OR DISTRIBUTION
Mutual funds payout or distribution is also one of the important and crucial criteria
for performance screening in terms of returns. According to law, mutual funds
have to distribute at least 90% of earnings to get the tax advantages. Some
mutual funds distribute cash dividends and some distribute bonus shares or
units. The payout can be monthly, quarterly or yearly. Investors who want to earn
a regular stream of income to meet their expenditures opt for mutual funds with
more frequency of payouts i.e. monthly or quarterly. Table 2 and 3 shows the
payout statistics for 2008 of entire mutual funds industry including conventional
and Islamic funds. Following table shows the payouts of funds for last 3 years
under comparisons:
Money Market / Fixed-Income Funds
Funds
2005-06 2006-07 2007-08
Payout Earning
%
% of
Earning
Payout Earning
%
% of
Earning
Payout Earning
%
% of
Earning
DMMF 11.53 11.77 97.95 10.90 11.18 97.50 10.25 10.06 101.89
PIF 5.00 10.11 98.91 5.25 10.70 98.13 4.75 9.06 104.86
UMMF 10.00 9.19 108.78 10.10 10.26 98.44 9.14 9.03 101.18
JSIF 60.50 11.36 106.51 53.30 10.05 106.07 9.72 * 9.45 102.86
AIF 57.50 11.49 100.09 50.00 9.93 100.70 47.50 9.32 101.93
Total /
Average
144.53 10.74 102.36 129.55 10.41 100.12 81.36 9.38 102.53
Table 6: Source = Annual Reports, Announcements and DCM Research
* In 2008, JSIF face value changed from Rs. 500 per share(unit) to Rs. 100 per share (unit)
Stock Funds
Funds
2005-06 2006-07 2007-08
Payout Earning
%
% of
Earning
Payout Earning
%
% of
Earning
Payout Earning
%
% of
Earning
NIT 5.28 28.32 186.46 6.20 44.83 138.30 6.50 (6.80) 955.88
PSM 30.00 26.81 223.80 25.00 29.41 170.01 17.00 (3.03) 1,122.11
ASMF 125.00 30.11 83.03 100.00 29.39 68.05 37.50 (6.82) 109.97
CDF 15.00 15.09 99.41 38.00 62.55 60.76 30.00 35.00 85.71
Total /
Average 175.28 24.23 136.23 169.20 39.46 99.30 91.00 3.26 317.10
Table 7: Source = Annual Reports, Announcements and DCM Research
* In 2008, funds paid from their reserves because of negative earnings due to market crash
B.MUTUAL FUNDS RISK
When it comes to investing in mutual funds, investors must understand about the
risk associated with them. Investors must decide on their risk tolerance and then

30
decide mutual funds. Every mutual fund has its own risk according to its
investment horizon. Stock funds are highly risky because of high volatility in stock
market whereas money market / fixed-income funds are less risky because of
fixed and guaranteed rates and low market volatility.
It is not easy to measure risk as a single numerical figure. For the past several
years, analysts have closely studied and still studying the feasibility of developing
standardized, quantitative measures of mutual funds risk1. Unfortunately, in our
market, risk is calculated on historical performance basis and no standardized
method has been developed to calculate expected risk and returns.
“If somebody can come up with a single way of defining risk, I think that is
wonderful. Of course, they would need to be able to predict the future in detail.”
A. Michael Lipper, president of Lipper Analytical Services Inc. (as reported in the
October 9, 1995 issue of Newsday)
The effort to apply a single yardstick of a fund’s risk would be not only fruitless,
but also highly counterproductive, creating far more problems than it solves. The
different concepts of risk cannot be captured in a single measure. Risk
encompasses many different concepts and, consequently, evades reduction to a
single quantitative measure.
There are varying methods of risk quantification and risk mitigation are identified
for mutual funds. We will consider methods which are very popular among entire
mutual funds industry.
1. DURATION
Duration is a measure for interest rate sensitivity. The change in the value of a
fixed income security that will result from a 1% change in interest rates. It applies
to bond (money market / fixed-income) fund. For example, 5 year duration means
the bond will decrease in value by 5% if interest rates rise 1% and increase in
value by 5% if interest rates fall 1%. Duration is a weighted measure of the length
of time the bond will pay out. Basically, duration is a weighted average of the
maturity of all the income streams from a bond or portfolio of bonds2
. Higher the

1
Investment Company Institute, Perspective, Volume 1, Number 2, November 1995, p. 6
2
Investorword.com, http://www.investorwords.com/1602/duration.html

31
duration, higher is the interest rate risk. Interest rates change with changing
economic conditions and can impact value of invested portfolio.
Duration Formula
Calculation of Duration
Consider a two-year bond with 4 coupon payments every six months of Rs. 50
and a Rs. 1000 face value, duration (in years) will be:
0.5
50
1200
1
50
1200
1.5
50
1200
2
50
1200
2
1000
1200
1.875 684.375
Interest Rate Sensitivity Formula
Calculation of interest rate sensitivity
A. Consider a +1% interest rate change in the market, with NAV of Rs. 10:
10 1.875 1% 0.19
0.19 Valuation Loss
B. Consider a +1% interest rate change in the market, with NAV of Rs. 10:
10 1.875 1% 0.19
0.19 Valuation Gain
Higher duration in upward trending interest rates can hurt a fund’s return while
downward trending interest rate risk gives fund managers a chance to enhance
returns. Fund managers monitor duration of a fund to control interest rate risks
and enhance return. Duration statement tells your fund manager’s stance on
interest rates and how much interest rate risk they have assumed. Long term
government bonds carry high interest rate risk while T‐Bills carry a very low risk.

32
Limitation
Duration is one of many good examples of the limitations of the available
quantitative risk measures. It estimates only interest rate risk, and provides no
information regarding credit, currency, or other risks. In fact, using duration to
measure fixed-income fund risk could be more harmful than beneficial,
exaggerating the importance of one risk element over others1
.
2. STANDARD DEVIATION:
A statistical measure of the historical volatility of a mutual fund or portfolio. More
generally, a measure of the extent to which numbers are spread around their
average2
.
Standard deviation, which measures performance volatility, is another instructive
example. To obtain a meaningful sample for computation, standard deviation
would likely have to be based on monthly or quarterly returns (thus, the SEC
proposed monthly returns over three years as a possible timeframe over which to
measure standard deviation). It is far from clear, however, how meaningful the
volatility of monthly returns would be for a fund shareholder investing for the long
term. Such an investor would probably view risk as the likelihood of a decline in
investment value, or the failure to meet a benchmark, over a long term time
horizon. In fact, it appears that most investors do view risk in this manner.8 There
is no reason to think that a measure of short-term volatility will correspond to the
risk of longer-term underperformance. Indeed, our research suggests that the
two have a slightly negative correlation3
.
Limitation
Standard deviation, measures the past variability of a fund’s return. Under certain
conditions, it can be used to compute a range or confidence interval that would,
on average, contain future returns about two thirds of the time. Many investors,
however, are not likely to understand standard deviation or its limitations.
Investors—especially the many viewing risk as the likelihood that a fund will
underperform—may be confused that a fund gaining five percent one month, ten
percent the next month and one percent the month after will have the same
standard deviation as a fund losing five percent one month, ten percent the next

1
Perspective, Investment Company Institute, Volume 1, Number 2, November 1995, pp. 6‐7.
2
Investorwords.com, http://www.investorwords.com/4688/standard_deviation.html
3
Perspective, Investment Company Institute, Volume 1, Number 2, November 1995, p. 7.

33
month and one percent the month after. They also may not appreciate that a fund
losing a constant two percent per month will have a standard deviation of zero1
.
3. ACTIVE RETURN OR ALPHA
Return relative to a benchmark. It is the difference of portfolio’s return and its
benchmark. A benchmark is the standard against which the performance of
mutual fund or any security can be measured. It is the return in excess of the
compensation for the risk borne2
.
In Pakistan, the benchmark of stock funds is KSE-100 index and money market /
fixed-income funds is average 6 months KIBOR. Balanced and hybrid funds use
the combination of both benchmarks depending on their authorized investments.
A fund generating positive alpha is considered as well managed and negative
alpha as poorly managed. Zero alpha means that the fund is performing with its
benchmark. Negative alpha denotes that the fund manager failed to beat even its
benchmark. This ratio translates that the investors must choose among the funds
having high positive alpha.
In the following performance table, stock funds alpha values are highly volatile as
compared to money market / fixed-income funds but also generating high returns
as well. One should be very careful while choosing on the basis of Alpha
measure. Again the investors’ risk tolerance will play a vital role here.
Following table shows the Alpha results of few funds:

1
Perspective, op. cit., pp. 8‐9
2
Wikipedia, http://en.wikipedia.org/wiki/Alpha_(investment)#column‐one

34
Benchmarks Jun-06 Jun-07 Jun-08
6M KIBOR 9.24 10.36 10.45
KSE-100 34.07 37.87 (10.77)
DMMF
Returns 11.77 11.18 10.06
Alpha 2.53 0.82 (0.39)
PIF
Returns 10.11 10.70 9.06
Alpha 0.87 0.34 (1.39)
UMMF
Returns 9.34 10.26 9.10
Alpha 0.10 (0.10) (1.35)
JSIF
Returns 11.36 10.05 9.45
Alpha 2.12 (0.31) (1.00)
AIF
Returns 11.49 10.23 9.32
Alpha 2.25 (0.13) (1.13)
Stock Funds
NIT
Returns 28.32 44.83 (6.82)
Alpha (5.75) 6.96 3.95
PSM
Returns 26.85 29.41 (3.01)
Alpha (7.22) (8.46) 7.76
ASMF
Returns 31.49 29.39 (6.84)
Alpha (2.58) (8.48) 3.93
CDF
Returns 15.09 62.55 35.10
Alpha (18.98) 24.68 45.87

35
4. BETA
The beta coefficient, in terms of finance and investing, describes how the
expected return of a stock or portfolio is correlated to the return of the financial
market as a whole rather than the fund’s own mean. An asset with a beta of 0
means that its price is not at all correlated with the market; that asset is
independent. A positive beta means that the asset generally follows the market.
A negative beta shows that the asset inversely follows the market; the asset
generally decreases in value if the market goes up and vice versa1
. It is
calculated for Stock based funds.
Formula for Beta Calculation:
,
Beta is also referred to as financial elasticity or correlated relative volatility, and
can be referred to as a measure of the sensitivity of the asset's returns to market
returns, its non-diversifiable risk, its systematic risk or market risk2
. As noted
above, in a well-diversified portfolio, total risk is equal to systematic risk, as the
specific risk has presumably been diversified away.
Following table shows the Beta calculation of Pakistani Stock Funds:
Funds 2006 2007 2008
NIT 0.70 0.56 0.71
PSM 0.25 0.65 0.73
ASMF 0.63 0.71 0.80
CDF 0.40 0.96 1.12
The table shows that Pakistani stock funds are weakly related to the benchmark
index (KSE-100) on the basis of beta calculation or last three years.

1
Wikipedia, http://en.wikipedia.org/wiki/Beta_coefficient
2
Ibid.

36
Limitation
Beta would correlate the fund’s historical returns with those of a benchmark
index. That beta is a relative measure illustrates another limitation: it is only
useful to the extent the fund’s performance is correlated with that of a benchmark
index. For many funds, an appropriate index may not exist. Many equity funds
have very little correlation with indices (as we have seen above). Beta is also
likely to provide useful information to investors only if they understand the
volatility of the index. It is doubtful, however, that many investors—even those
familiar with—will demonstrate familiarity with how volatile an index has been1
.
5. R-SQUARED
The R-squared statistic should be reported along with beta. R-Squared is the
measure of correlation between a fund and the market (benchmark). It is
calculated by regressing the fund against an appropriate index over time (KSE-
100). Values range between 0 and 1. The higher the value of R-Square, the
greater the correlation between the two2
. It is the coefficient of determination,
which tells you what percent of the movement in the fund is explained by
movement in the benchmark used in the regression analysis. The KSE-100 is the
benchmark most commonly used for this purpose. The higher the R-squared, the
more reliable beta is as a measure of probable variation.
R-squared is also the square of the correlation coefficient, as such it will give you
some idea of the degree of correlation between a fund and the benchmark but,
as the square root of a number is an absolute value, you won't know whether R is
positive or negative. It also won't tell you how a fund behaves relative to other
funds in your portfolio. But R-squared is still useful for screening, as low values
indicate that a fund may have good diversification potential and therefore
warrants a closer look3
.
An R-squared of 1 means that all movements of a fund are completely explained
by movements in the index. R-squared can be used to ascertain the significance
of a particular beta or alpha. Generally, a higher R-squared will indicate a more

1
2
Morningstar.com, http://www.morningstar.com/invglossary/r_squared_definition_what_is.aspx
3
Your Complete Guide to Investing in Mutual funds, http://www.investing‐in‐mutual‐funds.com/mutual‐
fund‐risk.html

37
useful beta figure. If the R-squared is lower, then the beta is less relevant to the
fund's performance1
.
Following Table shows the R-Squared figures of Stock Funds:
Funds 2006 2007 2008
Beta R-Squared Beta R-Squared Beta R-Squared
NIT 0.70 0.72 0.56 0.61 0.71 0.94
PSM 0.25 0.15 0.65 0.84 0.73 0.89
ASMF 0.63 0.88 0.71 0.92 0.80 0.97
CDF 0.40 0.24 0.96 0.45 1.12 0.82
A higher R-squared value will indicate a more useful beta figure. For example, if
a fund has an R-squared value of close to 1 but has a beta below 1, it is most
likely offering higher risk-adjusted returns. A low R-squared means you should
ignore the beta2
.
Together, beta and R-squared provide some insight to the probable degree of
correlation between a fund and the general market. They won't actually tell you
the degree of correlation, but they can provide a hint as to whether a particular
fund has good diversification potential. If it looks like a fund may have good
diversification potential, it may end up being a better addition to your portfolio
than some other fund that wins on a the risk-to-return basis3
.
C.MUTUAL FUNDS PERFORMANCE
On the basis of risk several methods have been identified to track the
performance of the mutual funds considering risk as a quantifiable measure.
Mutual fund performance must be evaluated on a risk-to-return basis, as neither
risk or return alone provides a sufficient means of evaluation. Together they
describe the tradeoffs investors need to make to assemble a portfolio that is at
least relatively efficient and is consistent with their level of risk aversion4
.

1
Morningstar.com, http://www.morningstar.com/invglossary/r_squared_definition_what_is.aspx
2
Investopedia.com, http://www.investopedia.com/terms/r/r‐squared.asp
3
Your Complete Guide to Investing in Mutual funds, http://www.investing‐in‐mutual‐
funds.com/screening‐mutual‐funds.html
4
Ibid, http://www.investing‐in‐mutual‐funds.com/mutual‐fund‐performance.html

38
The following statistical procedures can be used to screen mutual funds on a
risk-to-return performance basis:
1. RISK-ADJUSTED RETURN – RAR
Risk-adjusted returns are a pseudo measure of risk-to-return, as such they form
an intuitive bridge between return and risk and risk-to-return.
Risk-adjusted returns are always subject to scrutiny, as they are not always
calculated in the same manner. One way to calculate risk-adjusted returns is by
dividing mutual fund returns by standard deviation then multiplying by a relevant
benchmark's standard deviation. This will give you returns that are relative to the
benchmark on a risk-to-return basis. This method is useful in case of stock funds.
′
In the following performance table RAR of 2.55 means that NIT was
underperformed by its benchmark of KSE-100 index by 2.55 percentage points or
5.58*% on risk-adjusted basis in 2006. Whereas in 2008, RAR of NIT was 4.09
showing that it had outperformed KSE-100 index by 1.22 percentage points or
42.55% on risk-adjusted basis.
Stock Funds
Funds 2006 2007 2008
Return RAR Beat % Return RAR Beat % Return RAR Beat %
KSE-100 2.70 2.88 (0.63)
NIT 2.28 2.55 (0.15) -5.58% 3.24 4.09 1.22 42.25% (0.39) (0.49) 0.14 22.44%
PSM 2.35 3.38 0.69 25.40% 2.32 3.00 0.12 4.20% (0.04) (0.05) 0.58 91.54%
ASMF 2.49 3.43 0.73 27.10% 2.66 3.31 0.43 15.06% (0.34) (0.39) 0.24 38.46%
CDF 1.40 1.58 (1.12) -41.52% 4.51 2.90 0.03 0.94% 3.08 2.29 2.92 463.19%
* Returns are absolute
Other way to calculate RAR which is mainly used for money market / fixed
income funds, is taking a difference of fund’s return and its benchmark.
′

39
Risk-free rate:
It is the baseline from which the returns of all risky investments are measured.
This is based on the notion that there is a risk-free rate of return embedded in the
return of all risky investments. Short-term T-Bills are usually used as a proxy for
the risk-free rate, although even they include an inflation premium, all-be-it nearly
insignificant1
.
Risk-free rate is a theoretical interest rate that would be returned on an
investment which was completely free of risk. The 3-month Treasury Bill is a
close approximation, since it is virtually risk-free2
.
In theory, the risk-free rate is the minimum return an investor expects for any
investment because he or she will not accept additional risk unless the potential
rate of return is greater than the risk-free rate3
.
In the following performance table, the RAR of DMMF in 2006 is +3.14 which
means it has earned a return of 3.14 percent points in excess of risk-free rate
and 39.01% on risk adjusted basis. The table shows that money market / fixed-
income funds are quite efficient in beating risk-free rate thus providing investors
handsome spread for their risk borne.
Funds 2006 2007 2008
Return RAR % Return RAR % Return RAR %
3M T-Bill 8.05 8.63 8.69 8.69
DMMF 11.20 3.14 39.01% 10.65 2.03 23.52% 9.62 0.93 10.75%
PIF 9.68 1.62 20.17% 10.21 1.59 18.41% 8.83 0.14 1.60%
UMMF 8.99 0.94 11.65% 9.81 1.18 13.71% 8.87 0.18 2.10%
UTPIF 10.87 2.81 34.94% 9.73 1.11 12.85% 9.16 0.47 5.45%
AIF 10.94 2.89 35.84% 9.79 1.16 13.48% 9.05 0.37 4.22%

1
Your Complete Guide to Investing in Mutual Funds, http://www.investing‐in‐mutual‐funds.com/mutual‐
funds‐glossary.html#riskfree
2
Investorwords.com, http://www.investorwords.com/4299/risk_free_return.html
3
Investopedia.com, http://www.investopedia.com/terms/r/risk‐freerate.asp

40
2. COEFFICIENT OF VARIATION – CV
The coefficient of variation (CV) gives you a risk-to-return ratio, i.e., units of risk
per unit of return that can be used to compare mutual fund performance on a
level basis1
. It is calculated as:
′
When comparing two assets (funds), it is sometimes helpful to use the coefficient
of variation (CV), which is the standard deviation divided by the mean, thus
normalizing the standard deviation and facilitating the comparison of assets
(funds) on a risk-to-return basis. This works well period-by-period but, because
actual returns include the risk-free rate, which varies over time, it is not
appropriate for period-to-period comparison2
.
Funds 2006 2007 2008
Returns Std.
Dev.
CV Returns Std.
Dev.
CV Returns Std.
Dev.
CV
Money Market / Fixed-Income Funds (Annualized)
DMMF
11.20 2.46 0.22 10.65 4.90 0.46 9.62 1.51 0.16
PIF
9.68 2.49 0.26 10.21 0.99 0.10 8.83 0.72 0.08
UMMF
8.99 0.98 0.11 9.81 0.77 0.08 8.87 0.52 0.06
UTPIF
10.87 1.97 0.18 9.73 0.74 0.08 9.16 0.59 0.06
AIF
10.94 1.76 0.16 9.79 3.01 0.31 9.05 0.56 0.06
NIT
2.28 6.17 2.71 3.24 4.78 1.48 (0.39) 6.40 (16.34)
PSM
2.35 4.81 2.04 2.32 4.68 2.02 (0.04) 6.72 (149.89)
ASMF
2.49 5.03 2.02 2.66 4.86 1.83 (0.34) 7.09 (20.60)
CDF
1.40 6.12 4.38 4.51 9.38 2.08 3.08 10.77 3.49

1
fund‐performance.html
2
Ibid, http://www.investing‐in‐mutual‐funds.com/investment‐risk.html

41
The above statistics show that the money market / fixed-income funds have less
CV than stock funds. This proves that stock funds are highly risky and conversely
provide high returns as well.
3. SHARPE RATIO
Developed by William Forsyth Sharpe in 1966. Sharpe originally called it the
"reward-to-variability" ratio before it began being called the Sharpe Ratio by later
academics and financial professionals1
. He introduced the concept of risk-free
asset (rate)2
. It is one of the oldest risk measurement ratios. Recently, the
(original) Sharpe ratio has often been challenged with regard to its
appropriateness as a fund performance measure during evaluation periods of
declining markets3
.
Sharpe introduced following reward to variability ratio:
Numerator in the formula referred to as Excess Return. It is a very useful
measure of performance that is especially relevant when comparing mutual funds
within a category4
. It is based on historical data. The higher the Sharpe Ratio, the
better is the performance. The Sharpe Ratio is a measure of excess return per
unit of total risk5
.
The portfolio offering the highest reward/risk ratio then is the only risky portfolio in
which investors will choose to invest. Using average returns of the portfolio uses
Sharpe ratio to measure ex-post portfolio performance6
.

1
Wikipedia.org, http://en.wikipedia.org/wiki/Sharpe_ratio
2
Shah, S.M. Aamir and Hijazi, Syed Tahir, “Performance Evaluation of Mutual Funds in Pakistan”, in The
3
Ibid.
4
fund‐performance.html
5
Ibid.
6
Shah, S.M. Aamir and Hijazi, Syed Tahir, op. cit., p. 869.

42
Below performance table once again confirms the high volatility of stock based
mutual funds with negative values of Sharpe Ratio. The negative ratios indicate
the inability of the fund managers in diversification.
Sharpe Ratios
Funds 2006 2007 2008
DMMF 1.28 0.41 0.03
PIF 0.66 1.61 (1.06)
UMMF 0.97 1.54 (1.36)
UTPIF 1.43 1.50 (0.71)
AIF 1.64 0.39 (0.95)
Stock Funds
NIT (1.23) (1.47) (1.78)
PSM (1.56) (1.69) (1.64)
ASMF (1.46) (1.56) (1.60)
CDF (1.38) (0.61) (0.74)
The ratio was also used by rating agencies for scoring mutual funds. For
example, Pakistan Credit Rating Agency (PACRA) and Japan Credit Rating
Agency – Vital Information Services (JCR-VIS), rating agencies of scoring mutual
funds in Pakistan, were giving star ratings to mutual funds on the basis of Sharpe
Ratio and similar calculations. After June 2008, due to current financial crisis, the
criteria have changed and still no proper disclosure has been made by any of the
rating agency.
Limitation
The Sharpe ratio has as its principal advantage that it is directly computable from
any observed series of returns without need for additional information
surrounding the source of profitability. Unfortunately, some authors are carelessly
drawn to refer to the ratio as giving the level of risk adjusted returns when the
ratio gives only the volatility of adjusted returns when interpreted properly.
4. TREYNOR RATIO
Introduced by Jack Treynor. He introduced two types of risk, Systematic and
Specific (as mentioned earlier). It is the measure of the excess return per unit of
systematic risk. It is sometimes called as reward to volatility ratio. Similarly funds
having high ratio, means that it has more excess return per unit of systematic risk

43
and should be preferred. Treynor ratio uses Beta as a risk measure hence
considers the Systematic risk. This ratio also measures the portfolio manager’s
ability on the basis of rate of return performance and diversification by taking into
account systemic risk of the portfolio1
.
Treynor proposed the following model:
This model is usually used for stock funds because of the involvement of beta
which is the measure of volatility of stock funds. It was also used as a ranking
criterion along with the Sharpe Ratio.
The systematic risk of the data of the Pakistani stock mutual funds is given
below. Negative values of Treynor Ratio indicates the inability of the fund
manager for diversification. The beta of all funds in all years is less than one. If
the diversifiable risk which is company specific is fully diversified away by the
funds portfolio manager, the results of Sharpe ratio and Treynor ratio are same.
Our funds are facing the diversification problem that is why the results of both
ratios are not the same2
.
Stock Funds
Funds
2006 2007 2008
Beta Treynor Beta Treynor Beta Treynor
NIT 0.70 (10.88) 0.56 (12.43) 0.71 (15.96)
PSM 0.25 (29.82) 0.65 (12.22) 0.73 (15.14)
ASMF 0.63 (11.76) 0.71 (10.73) 0.80 (14.15)
CDF 0.40 (21.13) 0.96 (5.99) 1.12 (7.06)
Limitation
Like the Sharpe ratio, the Treynor ratio 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

1
2
Shah, S.M. Aamir and Hijazi, Syed Tahir, op. cit., p. 871.

44
not the case, portfolios with identical systematic risk, but different total risk, will
be rated the same. But the portfolio with a higher total risk is less diversified and
therefore has a higher unsystematic risk which is not priced in the market1
.
5. JENSEN’S ALPHA
Another ranking criterion, developed by Michael Jensen in the 19692
, also known
as Jensen's Performance Index or ex-post alpha or Jensen’s Differential
Measure, is used to determine the excess return of a security or portfolio of
securities over the security's theoretical expected return. It is an index that uses
the CAPM (Capital Asset Pricing Model) to determine whether a money manager
outperformed a market index3
.
The basic idea is that to analyze the performance of an investment manager you
must look not only at the overall return of a portfolio, but also at the risk of that
portfolio. For example, if there are two mutual funds that both have a 12% return,
a rational investor will want the fund that is less risky. Jensen's measure is one of
the ways to help determine if a portfolio is earning the proper return for its level of
risk. If the value is positive, then the portfolio is earning excess returns. In other
words, a positive value for Jensen's alpha means a fund manager has "beat the
market" with his or her stock picking skills4
.
Jensen introduced alpha in the capital asset pricing model to measure the
abnormal return of a portfolio—that is difference between the actual average
return earned by a portfolio and the return that should have been earned by the
portfolio given the market conditions and the risk of the portfolio5
.
Jensen measure is calculated as follows:
′

1
Wikiepedia.org, http://en.wikipedia.org/wiki/Treynor_ratio#column‐one
2
3
Investorwords.com, http://www.investorwords.com/2658/Jensen_index.html
4
Investopedia.com, http://www.investopedia.com/terms/j/jensensmeasure.asp
5
Shah, S.M. Aamir and Hijazi, Syed Tahir, Syed Tahir, op. cit, p. 871.

45
This measure is also for stock funds due to the involvement of beta. The alpha
figures of Pakistani stock based mutual funds are as follows:
Stock Funds
Funds 2006 2007 2008
NIT 1.63 18.99 (2.27)
PSM 10.92 1.22 1.88
ASMF 6.50 (0.41) (0.38)
CDF (4.44) 25.79 48.52
Positive alpha of the mutual funds is an indication that the funds outperform the
market proxy—KSE 100 index, and vice versa in terms of negative alpha.
Many academics believe financial markets are too efficient to allow for repeatedly
earning positive Alpha, unless by chance. To the contrary, empirical studies of
mutual funds spearheaded by Russ Wermers usually confirm managers' stock-
picking talent, finding positive Alpha. However, they also show that after fees and
expenses are deducted, the effective Alpha for investors is negative1
.
Nevertheless, Alpha is still widely used to evaluate mutual fund and portfolio
manager performance, often in conjunction with the Sharpe ratio and the Treynor
ratio.
6. INFORMATION RATIO – IR
A ratio of portfolio returns above the returns of a benchmark (usually an index) to
the volatility of those returns. The information ratio (IR) measures a portfolio
manager's ability to generate excess returns relative to a benchmark, but also
attempts to identify the consistency of the investor. This ratio will identify if a
manager has beaten the benchmark by a lot in a few months or a little every
month. The higher the IR the more consistent a manager is and consistency is an
ideal trait2
.

1
Wikipedia.org, http://en.wikipedia.org/wiki/Jensen%27s_alpha
2
Investopeida.com, http://www.investopedia.com/terms/i/informationratio.asp

46
It is calculated as:
Tracking Error:
It is the standard deviation of the active returns.
The information ratio is similar to the Sharpe ratio but, whereas the Sharpe ratio
compares the excess return of an asset against the return of a risk free asset, the
information ratio compares active return to the most relevant benchmark index.
That is to say, the Sharpe ratio equals the information ratio where the benchmark
is a risk-free asset (e.g. cash or government bonds)1
.
The information ratios of Pakistani mutual funds are:
Funds 2006 2007 2008
DMMF 0.86 0.06 (0.55)
PIF 0.19 (0.17) (1.23)
UMMF (0.23) (0.68) (1.64)
JSIF 0.81 (0.88) (1.65)
AIF 1.06 (0.18) (1.60)
Stock Funds
NIT (0.12) 0.10 0.21
PSM (0.05) (0.21) 0.21
ASMF (0.07) (0.11) 0.18
CDF (0.20) 0.24 0.76
In the above performance table, both stock and money market / fixed-income
funds are showing negative IR values indicating problems with prudency in fund
management and diversification. Especially in 2008, all money market / fixed-
income funds are under performed but stock fund managers did the excellent job
in getting positive IR values despite the market crash due to financial crisis.

1
Wikipedia.org, http://en.wikipedia.org/wiki/Information_ratio

47
D.NON-QUANTITATIVE RISK ASSESSMENTS
In addition to the quantitative assessment, few non-quantitative approaches have
also been identified. Investment Company Institute in its journal, Perspective,
Volume 1, Number 2, November 1995, identified following assessments:
1. SELF-ASSESSMENT OF RISK
Many fund sponsors include in sales literature a ranking of the relative risks of
the funds within their complex. In general, such measures assist comparison of
different types of funds. For instance, a fund complex may provide a “risk
spectrum,” with a money market fund at the low end and an aggressive growth
fund at the high end. Such rankings, however, appear inappropriate as mandated
prospectus disclosure.
Requiring such self-assessment would raise serious liability concerns. For
example, a fund categorized as “low risk” could incur liability if an unforeseen
market event, such as a significant devaluation of a foreign currency, caused a
precipitous decline of net asset value. (As a result, few funds would feel
comfortable labeling themselves as “low risk.”) Instead, funds would likely feel
compelled, out of liability concerns, to include considerable narrative describing
the risk scale and the basis for assessment. Such disclosure runs counter to the
general SEC objective of prospectus simplification.
Also, subjective self-assessments, many of which are fairly broad risk categories
such as low, medium, and high, would prove useless to investors comparing
funds from different sponsors (e.g., comparing one money market fund with
another).
2. RISK MANAGEMENT PROCEDURES
To the extent risk management procedures are deemed material to an
investment decision, they should be, and generally are, fully disclosed.
Otherwise, we question their relevance to investors. And a detailed discussion of
technical aspects of portfolio investing will merely lengthen fund prospectuses,
with no corresponding investor benefit. Most investors are not likely to

48
understand procedures such as “stress testing,” or their relevance. In addition,
funds could be forced to disclose proprietary information. Finally, and perhaps
most important, it could be implied that such disclosure seeks to eliminate all
risks, clearly not the case and emphatically not consistent with the concept of
investing in securities.
There are many other factors to consider when analyzing a mutual fund's
portfolio. By analyzing the sector weights of a fund and the fund manager's
attributions to performance, an investor can better understand the historical
performance of the fund and how it should be used within a diversified portfolio of
other funds. An investor can also break down the portfolio into market cap
groupings and determine whether the fund manager is particularly skilled at
picking companies with certain size characteristics.
Many investors tend to focus exclusively on investment return, with little concern
for investment risk. The risk measures just discussed can provide some balance
to the risk-return equation. The good news for investors is that these indicators
are calculated for them and are available on several financial websites, as well
as being incorporated into many investment research reports. As useful as these
measurements are, keep in mind that when considering a mutual fund
investment, volatility risk is just one of the factors you should be considering that
can affect the quality of an investment.

50
CONCLUSION
From the review, it has been concluded that mutual funds are the important
source of investment for both the households and institutions. The key factor is to
decide the mutual funds on the basis of one’s risk tolerance. The review provides
certain yardsticks to gauge the mutual funds giving examples of Pakistani mutual
funds performance on these yardsticks to help understand the readers the basic
concept of risk and reward trade-offs.
The methods explained above to measure the performance of mutual funds
under risk and return perspective, are all historically based. Despite this,
however, investors may unduly rely on them as predictive of future risk or
performance, or even promissory in nature – despite disclosure to the contrary.
As a result, investors may not understand that a fund could behave very
differently because of changes in market conditions (e.g., changes in interest or
foreign exchange rates) or portfolio holdings.
“Several measures are being used to describe mutual funds’ riskiness. Most are
complex, none is perfect, and all have the potential to mislead…”1
Russ Wiles, Los Angeles Times
The risk and return understanding and quantitative measurement of risk on
investment related to its return (or benchmark) is still in a process of
development in our country. A layman investor is still unaware of the
performance measurement yardsticks of the investment like mutual fund which is
the most common vehicle of investment throughout the world. Unfortunately,
evidence exists that many investors already may be making investment decisions
ill advisedly. It would be deeply disturbing to further aggravate this alarming
trend. Also reliance on a single, numerical measure of risk may cause investors
to make the wrong investment decisions.

1

51
“I worry that, by focusing exclusively on the riskiness of each individual fund, the
SEC may scare investors into sticking with more conservative investments.”1
Jonathan Clements, The Wall Street Journal
Similarly, the risk of any particular investment needs to be considered in light of
the other elements of an investor’s portfolio. Many mutual fund sponsors,
investment advisers, personal finance columnists, and others have long stressed
the importance of evaluating investments within the context of one’s overall
portfolio.11 Even assuming the appropriateness of short-term volatility (as
measured by standard deviation) as a risk measure, one cannot be sure of any
one investment’s effect on the overall volatility of an investor’s portfolio (which
from an investor’s perspective would be the more relevant consideration).
As discussed above, investors in our country only look at the return side of the
investments and completely ignores the risk assessment side, which is
dangerous. Current financial crisis is, in one way, the result of improper risk
management. Now financial institutions along with the regulator have
emphasized of having risk manager in every institution including Asset
Management Company in particular to advice fund managers on risk-to-return
trade-offs on each investments in a portfolio.
Mutual Funds Industry in Pakistan is at present set to takeoff to new heights. But
to achieve this, concerted and sustained efforts are required both from the
stakeholders and the regulators. At present, they are playing their due role for the
growth and development of the industry. The government is taking a series of
measures to provide the necessary conducive working environment whereas the
stakeholders/operators of the industry are striving hard to create the requisite
awareness about the mutual funds among the masses through media, training
programs etc. and also by developing their reputation and maintaining good

1

52
records. If these efforts are made on regular basis, it is hoped that the mutual
funds industry in Pakistan will be able to achieve the desired results in medium to
long term.
RECOMMENDATIONS
Current financial crisis has shaken the investors’ confidence from the capital
markets which had adversely affected the mutual funds industry in Pakistan. Now
there is a dire need from the regulator and association to come forward along
with AMCs to play their due role in the development of this industry.
The steps taken by participators of the industry seem inadequate to restore the
investors’ confidence. In fact, their measures (including freeze of stock market
and equity funds) engendered confusion.
This industry had a very successful period during 2006 and 2007. They were
managing all time high assets under management and giving handsome returns
beating their respective benchmarks. But now the situation is changed. The
assets under management are dropped to more than half. It is true that the
values are bottomed out but at the same time the probability of a rebound is also
reasonably high.
The participants should take certain steps to more educate the investors
especially retail and households and provide awareness about their investment
products especially risk to reward trade-offs, through advertisements, media,
training programs etc. as it is observed that funds focusing on retail clientele
emerged stronger. They should strive hard to provide more conducive
environment to the investors.
The size of the mutual funds sector in Pakistan is still very small as compared to
developed counties and even India. The sector cannot be strengthened without

53
broadening retail investor base. This objective is hard to achieve without
attracting small investors, extending outreach and ensuring uninterrupted
redemption and sales. This can only be done through large scale education of
households regarding investments avenues and need of savings and
investments. Proper risk disclosure should also be provided so that every
household be able to decide on his or her risk tolerance.
While selling the code of ethics should not be ignored. Misrepresentation by a
sales agent is also a major reason for this set back. They should provide realistic
information to investors regarding the risk profile of the mutual funds so that the
Code of Ethics for Investments is not violated.
Currently there is a lack of investments avenues, therefore, AMCs have to invest
in long term illiquid investments creating a highly risky environment for investors
as well as for funds. Fund manager should maintain a balance between long
term and short term investment by keeping the funds risk profile in mind.
Regulator and association with collaboration with investment companies should
provide enough invest avenues in the market to cater the increasing needs of the
investments. At the same time AMCs should concentrate on their strategies to
bring more and more retail investors to the industry.
The need is to develop a confidence of households and also institutions in these
investments products. Investing small savings of households in a huge pool of
investment baskets, with the support of institutional investments, our economy
may able to post success stories like west.

55
1. Rao, P. Hanumantha and Mishra, Vijay Kr., “Mutual Fund: A Resource
Mobilizer in Financial Market”, in Vidyasagar University Journal of
Commerce, Vol. 12, March 2007.
2. Invest Wisely: An Introduction to Mutual Fund, U.S. Securities and
Exchange Commission, http://www.sec.gov/investor/pubs/inwsmf.htm.
3. Jones, Charles P. (2005-06), Investments Analysis and Management, 10th
edition, California.
4. Aamir Shah, S.M. and Hijazi, Syed Tahir, “Performance Evaluation of
Mutual Funds in Pakistan”, in The Pakistan Development Review 44:4
Part II, Winter 2005.
5. 2009, Investment Company Fact Book, 49th
Edition, A Review of Trends
and Activity in the Investment Company Industry
6. Perspective, Investment Company Institute, Volume 1, Number 2,
November 1995
7. MUFAP Sources, www.mufap.com.pk
8. MUFAP, Country Report Pakistan 2007.
9. Your Complete Guide to investing in Mutual Funds, http://www.investing-
in-mutual-funds.com/risk-and-return.html#investment
10.Your Complete Guide to Investing in Mutual funds, http://www.investing-in-
mutual-funds.com/mutual-fund-risk.html
11.Your Complete Guide to Investing in Mutual funds, http://www.investing-in-
mutual-funds.com/screening-mutual-funds.html
12.Your Complete Guide to Investing in Mutual Funds, http://www.investing-
in-mutual-funds.com/mutual-funds-glossary.html#riskfree
13.Your Complete Guide to Investing in Mutual Funds, http://www.investing-
in-mutual-funds.com/mutual-fund-performance.html
14.The Financial Planning Center, Mutual Fund Risk, http://www.open-
ira.com/Education_Center/3c_Mutual_Fund_Risk.htm
15.Investorwords.com,
http://www.investorwords.com/4688/standard_deviation.html

56
http://www.investorwords.com/4299/risk_free_return.html
http://www.investorwords.com/2658/Jensen_index.html
18.Investopedia.com, http://www.investopedia.com/terms/r/r-squared.asp
19.Investopedia.com, http://www.investopedia.com/terms/r/risk-freerate.asp
20.Investopedia.com,
http://www.investopedia.com/terms/j/jensensmeasure.asp
21.Investopeida.com,
http://www.investopedia.com/terms/i/informationratio.asp
22.Wikipedia.org, http://en.wikipedia.org/wiki/Sharpe_ratio
23.Wikiepedia.org, http://en.wikipedia.org/wiki/Treynor_ratio#column-one
24.Wikipedia.org, http://en.wikipedia.org/wiki/Jensen%27s_alpha
25.Wikipedia.org, http://en.wikipedia.org/wiki/Information_ratio
26.Morningstar.com,
http://www.morningstar.com/invglossary/r_squared_definition_what_is.asp
x

58
AAML Atlas Asset Management Limited
AHIML Arif Habib Investments Management Ltd
AHIML Arif Habib Investments Management Limited
AIF Atlas Income Fund
AMC Asset Management Company
ASMF Atlas Stock Market Fund
CAM Crosby Asset Management
CAPM Capital Assets Pricing Model
CDF Crosby Dragon Fund
CV Coefficient of Variation
DCM Dawood Capital Management Limited
DMMF Dawood Money Market Fund
IR Information Ratio
JSIF JS Income Fund
JSIL JS Investments Limited
MUFAP Mutual Funds Association Of Pakistan
NIT National Investment Trust
PIF Pakistan Income Fund
PSM Pakistan Stock Market Fund
RAR Risk-Adjusted Return
RF Risk-Free Interest Rate
SEC Securities And Exchange Commission
SECP Securities And Exchange Commission of Pakistan
T-Bill Treasury Bill
UBLFM UBL Fund Managers
UMMF United Money Market Fund

60
Money Market / Fixed-Income Funds Monthly Returns Summary for 36 months from Jul-2005 to Jun-2008
Monthly Return Summary 2005-2006
Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06
6M KIBOR 8.90 8.93 8.90 9.02 9.14 9.14 9.14 9.25 9.34 9.49 9.67 10.03
3M T-Billk 7.62 7.86 8.10 8.10 8.10 8.09 8.10 8.10 8.10 8.10 8.10 8.29
DMMF 7.54 7.16 10.86 9.30 12.09 15.33 10.93 11.37 12.86 11.66 10.63 14.64
PIF 4.70 6.33 7.22 12.05 9.24 9.56 12.64 11.13 12.62 10.42 9.99 10.24
UMMF 8.29 8.07 8.13 8.96 9.26 9.36 10.37 9.66 9.67 9.77 9.54 6.84
UTPIF 7.14 8.61 14.62 12.47 10.96 11.59 11.96 11.45 8.97 10.36 11.89 10.41
AIF 6.80 9.78 11.03 10.88 10.27 10.98 12.47 12.39 12.51 10.19 10.34 13.68
6M KIBOR 9.92 10.42 10.37 10.51 10.56 10.61 10.55 10.49 10.43 10.25 10.17 10.03
3M T-Bill 8.32 8.63 8.64 8.64 8.64 8.64 8.64 8.64 8.65 8.69 8.69 8.69
DMMF 6.95 11.00 11.55 9.67 9.52 21.99 1.29 11.37 13.67 6.69 11.03 13.12
PIF 8.22 9.57 10.05 10.56 11.99 10.81 10.27 10.78 11.19 9.44 9.28 10.40
UMMF 10.57 9.41 8.77 9.84 10.55 10.81 10.19 9.77 9.00 9.35 8.69 10.76
UTPIF 9.30 9.09 10.22 8.72 9.85 10.64 10.17 10.58 9.48 10.54 8.40 9.83
AIF 9.98 10.20 9.87 9.41 9.08 8.68 8.05 8.54 8.41 7.02 9.31 18.91
6M KIBOR 9.97 10.13 10.01 10.00 9.97 9.97 10.05 10.28 10.32 10.37 11.46 13.32
3M T-Bill 8.69 8.69 8.69 8.69 8.69 8.69 8.69 8.69 8.69 8.69 8.69 8.69
DMMF 9.72 9.64 8.22 9.97 10.15 8.97 10.03 10.57 10.64 12.12 9.51 5.90
PIF 8.91 10.47 8.82 8.70 7.99 9.26 7.84 8.80 9.50 8.93 8.12 8.57
UMMF 8.98 9.13 8.83 8.87 8.31 8.85 9.52 8.45 8.41 9.29 7.98 9.80
JS-IF 9.52 9.23 8.90 9.62 8.53 8.18 9.68 8.61 8.98 9.10 9.20 10.38
AIF 8.57 8.53 9.92 8.65 9.07 8.39 9.54 8.38 9.41 9.16 9.12 9.89

61
Stock Funds Monthly Returns Summary for 36 months from Jul-2005 to Jun-2008
KSE (3.65) 8.64 5.47 0.26 9.45 5.86 10.13 8.86 0.26 (1.25) (13.59) 1.93
10Y PIB 7.13 7.13 7.13 7.13 7.13 7.13 7.13 7.13 7.13 7.13 9.85 9.85
NIT (0.21) 4.39 9.94 4.29 9.89 4.15 9.42 0.62 (1.32) (2.95) (11.42) 0.52
PSM 0.23 7.29 7.76 4.03 5.27 6.72 0.60 1.39 (2.18) (9.12) 1.03 5.22
ASMF 1.03 3.98 6.06 2.73 6.64 2.99 9.09 6.03 1.82 (0.86) (10.67) 1.05
CDF 0.23 0.74 6.90 1.71 6.26 6.70 4.84 0.65 4.50 (15.21) (3.76) 3.20
KSE 5.09 (4.14) 4.46 7.75 (6.25) (5.45) 12.27 (0.82) 0.82 9.74 4.78 6.26
10Y PIB 9.85 9.85 9.85 10.39 10.39 10.51 10.51 10.51 10.15 10.13 10.13 10.11
NIT 4.71 (2.00) 5.88 (0.32) 0.75 (4.26) 8.11 (1.54) 1.98 10.24 9.01 6.27
PSM 5.22 (5.25) 2.68 3.71 (4.74) (3.39) 6.44 0.24 1.99 7.81 7.81 5.37
ASMF 4.36 (2.97) 3.64 6.69 (4.05) (4.40) 8.87 (0.21) 0.08 8.04 8.04 3.83
CDF 3.20 (9.10) 2.75 7.94 (7.69) (3.57) 6.01 5.62 0.10 8.62 16.57 23.68
KSE (0.24) (11.10) 9.33 7.25 (2.25) 0.56 (0.43) 6.54 1.28 (0.02) (19.78) 1.31
10Y PIB 10.11 10.34 10.34 10.20 10.20 10.20 10.78 10.78 11.43 11.43 11.43 13.41
NIT 0.30 (9.05) 8.00 8.94 (0.58) (0.17) - 4.01 1.12 (1.11) (14.30) (1.87)
PSM 0.75 (9.22) 11.16 8.22 (1.55) (3.84) (1.23) 6.49 1.67 (1.17) (12.41) 0.60
ASMF (0.72) (8.60) 8.10 7.06 (1.24) (2.61) 0.91 6.72 2.13 0.58 (17.43) 0.96
CDF (2.76) (10.52) 16.02 11.83 0.71 2.24 2.33 11.52 5.70 16.90 (20.07) 3.13

MUTUAL FUNDS - RISK AND RETURN PERSPECTIVES

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