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A Performance Analysis Of Income Funds In Pakistan

Introduction

“Mutual fund is a pool of money invested according to a common investment objective by an asset management company (AMC) on behalf of the fund’s investors”. A fund can make profits from three different sources, Dividend, Capital Gains and Appreciation of Share Price. The figure shows a mutual fund is deals with the following entities; trustee, auditor, SECP, AMC and investor. A mutual fund provides liquidity, portfolio management expertise, risk diversification, and stability to stock market [1] and it also mobilizes savings by attracting funds from small investor.

Investment firms (banks, Financial Institutions) managed by financial professional lists that rise its capital by selling its shares to the public. Mutual Fund’s capital is invested in a pool of corporate securities, commodities. The level of mutual funds income from its portfolio’s determines the daily market value called Net Assets Value at wider its units are redeemable on any business day and the dividend paid to its units holders.

History

Under the Trust Act of 1882 Mutual funds in Pakistan are registered and legally established in the form of a Trust. The mutual fund industry in Pakistan is regulated by; the Securities and Exchange Commission of Pakistan (SECP) which licenses each Asset Management Company in strict agreement with the NBFC Rules, 2003 and requires all AMC’s to obtain an independent rating.

Mutual Funds introduced in Pakistan in 1962, with the public offering of National Investment (Unit) Trust (NIT), followed by the establishment of the Investment Corporation of Pakistan (ICP) in 1966.

Performance Overview

Pakistan’s financial sector has witnessed many developments in the recent past that has unfolded different forms of investment alternatives paving way for financial institutions to grow accordingly. It has tremendous growth potential as our country is amongst the most profitable nations to prevail in the origin. It can play a vital role in areas like leasing, insurance business, and can contribute heavily towards the economic growth. Services sector has constituted around 54 percent share towards the GDP.

In last few years, improvement in the economic stability of Pakistan have resulted in the out performance of different industries that have contributed a great deal in raising general public wealth and have improved overall investor’s confidence in the financial and equity markets. Where industries like banking, Financial institutions, Oil & gas, Technology and many more were giving great profit margins to their shareholders; Mutual fund industry at that time provided the time needed food for general public and for corporate by launching simple and diversified investment horizons that attracted most of the nation.

It has become difficult for the small investors to directly invest in the stock market keeping in view the growth of the capital market in Pakistan and the phenomenal increase in share prices. Another difficulty is controlling the volatility of return over investment. These two are the main factors that have contributed in the remarkable growth of Mutual Fund Industry in Pakistan. But we can never forget the tremendous support this industry has received from the Government of Pakistan through Securities and Exchange Commission of Pakistan.

Types of Mutual Funds

There are two main types of Mutual Funds

Opened Ended Funds

Close Ended Funds

Open Ended Funds

Where the capitalization of the fund is not fixed and more units can be sold at any time to increase its capital base.

Close Ended Funds

Where capitalization is fixed and limited to the number of units authorized at the fund inception.

Mutual funds are usually charge a management fee 1% to 3% of the fund’s annual earning and may also charge other fees, sales commission called Loads.

Opened end or class-end funds can be of several types, however most basic classifications are:-

Stock funds.

Income and money market funds.

Pension funds.

Islamic funds

specialty funds

Importance of Performance analysis

The performance Analysis is important because with the help of we can compare different return earn by different mutual funds. Further it elaborates the level of risk involve in various mutual funds. It helps an investor where he should invest his money means an investor sees higher return along with minimum risks.

Objective of the Study

The research on mutual funds in Pakistan is inadequate and mostly limited to the performance analysis of equity funds mainly due to their control in the industry and significance of the stock market performance in the country.

The research on income funds are less focused in this industry. Thus, current study is attempted to analyze its performance of the income funds in the Pakistan industry.

Literature Review

Financial systems in a modern economy transfer resources over space, time and sectors. The flow of funds in a financial system occurs through financial systems and financial intermediaries. The major functions of this system are to transfer resources, manage risk, subdivide and pool funds and clear transactions.

These financial systems permitted investments to be committed to their most productive uses rather than being bottled up where they are least needed. Mutual funds in this regard help the economy to continuously rotate money in and out of the systems to make it remain hydrant. The mutual funds not only pools but subdivides the funds based on the need of individual investor.

The current and past environment of Pakistani Financial markets have always supported the Mutual fund industry due to their ability to pool and diversify investments that helps the money rotates to complete the fund transfers in and out of economy. The current scenario is a clear indication of the rising income levels as the money flow in the industry have shown a sharp increase in last three to four years. This rise have not only mobilized the money rotation but have also helped economy to develop at a much desired pace to beat inflation and help country fight out the phases of past recession that have somehow dampened the economic growth and prosperity.

In many developing countries, including several middle-income countries in Asia and the Pacific, the mutual funds industry has displayed considerable progress in recent years. Although Pakistan had an early start with the setting up of NIT in 1962 and subsequently the ICP mutual funds, for almost 40 years, until 2002, the progress made was lackadaisical at best. In fact, the industry suffered both as a consequence of poor management as well as Government intervention and the distortions thus induced. During the past five years, prompted by positive changes in Government policy and regulation, as also measures to privatize and allow new entrants, the industry has witnessed major improvements and enhancement.

A number of researchers have empirically evaluated the Funds performance with it attributes in different time periods for the developed economies (Soderlined et al,2000; Korkeamaki and smythe,2004) .

A research were carried by Otten and Bams (2002) Maastricht University, in 2002 on European mutual funds. The results recommend that mutual funds particularly small capitalization funds are capable to add value. The author also indicated that industry is still covering behind the United State industry both in market capitalization and assets size.

In 2001 Malkiel and Radisich research found that over the 1990s in the united state index funds produced return more than active funds by 1 to 2 hundred points per year. He found that passive funds perform well due to two reasons management fee and trading costs.

Therefore, Mutual funds performance is one of the most frequently studied topics in investments area in most countries. The reason for this popularity is availability of data and the importance of mutual funds as vehicles for investment in the stock market for both individuals and institutions. Mutual funds generally provide three benefits to their investors.

First, they reduce the risk of investing in the stock market by diversification. Second, they provide professional management by experts in the stock market and third, by pooling of investment funds, they allow small investors to hold a diversified portfolio.

First, and third benefit of the mutual funds is consider as real benefits. The second benefit of having access to financial expertise has been questioned extensively in finance literature. A vast amount of literature exists in finance on the topic of market efficiency that recommends passive investment and suggests that paying money to so-called investment professionals is a fool’s game. As evidence they have tested again and again the performance of these professionals, such as mutual funds, and found evidence to support their hypotheses of market efficiency. Pakistani investors have not been catch with tremendous interest untile recently (on the academic side there are two recent papers on the role of corporate governance and mutual funds in Pakistan by Cheema and Shah (2006) and Saeed and Syed (2005).

Evaluation of funds performance seems a straight affair as one has to do is determine the rate of return earned by investing in each mutual fund and then ranking the funds accordingly, the best fund being the one that provides the highest return. A quick look at the returns tells us that there is great variability in returns over time for any fund. A fund may do well in one year but not so in another. Though comparison of performance on the basis of returns is the simplest, it is also wrong. The missing ingredient is risk. It is now considered a generally accepted fact in finance that there is a direct relationship between risk and return: the higher the risk, the higher is the expected return.

There are two things clear firstly that the analysis should be done over a long period of time to be of significance, and secondly that risk has to be incorporated in the analysis. It is the second requirement, the inclusion of risk that is the problem.

Two popular ways of defining risk in finance - standard deviation of returns (In 1960 William F. Sharpe introduced the concept of risk free asset. Combing the risk free asset with the Markowitz efficient portfolio he introduced the capital market line as the efficient portfolio line. In order to determine which portfolio offer the most positive risk/return trade-off, the ratio of the historical returns in excess of the risk-free rate to the standard deviation of the portfolio returns is calculated.

The two types of risk systematic risk and unsystematic risk were introduced by Treynor. He indicated that systematic risk is connected with market .it cannot be diversified away .It can be calculated by beta. He says a portfolio expected return depends on its beta. The Other type of risk is Unsystematic risk which is specific to a company. The uncertainty attached with the specific company can be diversified away.

Standard deviation captures the overall variability of returns.

Beta captures that component of the risk that cannot be diversified away.

Thus, according to CAPM, beta is the only relevant measure of risk. When it comes to evaluating the performance of a mutual fund it is not clear whether standard deviation or beta is the relevant measure of risk. If the investors invest only in a mutual fund then the relevant measure of risk is the standard deviation of the returns of the mutual fund. However, if the fund were to be a part of a well-diversified portfolio then the relevant measure of risk would be the beta.

In the literature, we found the following most commonly used risk-adjusted performance measures based on ex-post returns in the perspective of Capital Asset Pricing Model (CAPM):

• Sharpe’s measure (Sharpe, 1966)

• Treynor’s measure (Treynor, 1965)

• Jensen’s Alpha (Jensen, 1968)

The above measures are derived by capital market theory and the CAPM and dependents upon the assumptions involved with this theory.

Research Question

Management fees effects the performance of the fund.

Past performance of a fund do not guarantee future performance of the funds.

Return of the fund cannot indicate the performance of the fund unless risk factors are included.

Population of Research

The following are the Population of Research

S#

NAME OF FUND

ESTABLISHED

DATE

CATEGORY

1

ABL Income Fund

Sep – 2008

Income Fund

2

AKD Income Fund

Mar – 2007

Income Fund

3

Meezan Islamic Income F und

Jan – 2007

Islamic Fund

4

Meezan Sovereign Fund

Feb – 2010

Islamic Income

5

Al Falah GHP Income Fund

Multiplier

Jun – 2007

Aggressive Fixed Income Fund

6

Metro Bank Pakistan Sovereign Fund 12/12

Mar – 2003

Income Fund

7

Metro Bank Pakistan Sovereign Fund (perpetual)

Mar – 2003

Income Fund

8

Pakistan Income Encashment Fund

Aug – 2008

Aggressive Fixed Income Fund

9

Pakistan Income Fund

Mar – 2002

Income Fund

10

Askari Income Fund

Mar – 2006

Aggressive Fixed Income Fund

11

Askari Islamic Income Fund

Sep – 2009

Islamic Fund

12

Atlas Islamic Fund

Mar-2004

Income Fund

13

Atlas Islamic Income Fund

Oct – 2008

Islamic Income

14

BMA Chundriger Road Sovereign Fund

Aug-2007

Income Fund

15

Crosby Phoenix Fund

Aug-2009

Income Fund

16

Dawood Money Market fund

May-2003

Income Fund

17

Faysal Islamic Growth Fund

Oct-2005

Islamic Income

18

Faysal Savings Growth Fund

May-2007

Income Fund

19

First Habib Income Fund

May – 2007

Income Fund

20

HBL Income Fund

Feb – 2007

Income Fund

21

IGI Aggressive Income Fund

Oct – 2007

Aggressive Income Fund

22

IGI Islamic Fund

April – 2009

Islamic Income

23

IGI Islamic Income Fund

Dec – 2009

Aggressive Fixed Income Fund

24

Js Aggressive Income Fund

Jan – 2008

Income Fund

25

JS Income Fund

Aug – 2002

Aggressive Fixed Income Fund

26

KASB Income Opportunity Fund

May-2006

Islamic Aggressive Fixed Income Fund

27

KASB Islamic Income Opportunity

Jun-2008

Income Fund

28

Lakson Income Fund

Jun-2009

Income Fund

29

MCB Dynamic Cash Fund

Jan-2007

Income Fund

30

NIT-Government Bond Fund

Nov-2009

Income Fund

31

NIT-Income Fund

Feb-2010

Income Fund

32

NAFA Income Fund

Mar-2008

Income Fund

33

NAFA Income Opportunity Fund

Apr-2006

Islamic Aggressive Fixed Income Fund

34

NAFA Islamic Aggressive Income Fund

Oct-2007

Income Fund

35

NAFA Savings Plus Income Fund

Nov-2009

Income Fund

36

Pak Oman Advantage Islamic Fund

Oct-2008

Islamic Income

37

PICIC Income Fund

Jul-2010

Income Fund

38

UBL Islamic Savings Fund

Nov-2010

Islamic Income

39

UBL Savings Income Fund

Oct-2010

Income Fund

40

United Growth & Income Fund

Mar-2006

Aggressive Fixed Income Fund

41

United Islamic Income Fund

Oct-2007

Islamic Aggressive Fixed Income Fund

42

Pak Oman Advantage Fund

May-2007

Income Fund

Sampling Procedure

The Judgment sampling has been used because availability of data is important for any research. Pakistan Income funds have not lifetime more than 12 years and majority of funds have existence of less than 6 years. The research sample consists 6 Income Funds of different 6 Fund management institution.

The Sample is

S. No

Fund Name

Establish Date

Category

Net Assets Value

(Rs. In ‘000)

December-2010

1

Pakistan Income Fund

May-2007

Income Fund

1,936,742

2

Faysal Savings & Growth Fund

Mar-2007

Income Fund

6,352,502

3

Js Income Fund

Aug-2002

Aggressive Fixed Income Fund

743,074

4

United Growth & Income Fund

Mar-2006

Aggressive Fixed Income Fund

4,267,400

5

HBL Income Fund

Feb-2007

Income Fund

1,525,374

6

Askari Income Fund

Mar-2006

Aggressive Fixed Income Fund

1,283,277

Data Collection

The data was collected from July-2008 to June-2010 from various sources. The six month T. Bills rate was used as Risk Free Return () and Return on market ( ) of funds was calculated by using 1 month KIBOR rate.

Ethical Consideration

Secondary data was required for this research and collected from the authenticated sources which are legally authorized to publish the data.

Data Preparation

The secondary data has been collected from authentic sources for the analysis which has recorded and transformed into a meaningful quantitative data so that certain statistical tools will be applied.

I have extracted 1 Month Kibor Rate from July-2007 to June-2010. Selected Institutions data was transformed into Quantitative Form for the use of analysis.

Risk Free Rate was extracted from the site of State bank of Pakistan.

Price of the Selected Fund was collected from their respective Site.

Operational Definition of Research Variables

The following are research variable

Net Asset Value of Fund

Monthly Return

Beta of Funds return with Market

Return on Market

Return of Risk Free Assets

Risk Adjusted Performance

Net Asset Value of Fund

“The Rupee value of a single fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding Calculated at the end of each business day.

Monthly Return

Monthly Return is the Monthly gain or loss on investment.

Beta of Funds return with Market

Beta is a measure of risk that, when applied to investment portfolios (as distinct from individual stocks), provides useful statistical information. It indicates a fund's past price volatility relative to a particular stock market index.

Return on Market

As a whole the return on market is called the market portfolio.

Return on Risk Free Assets

The Returns on Risk Free Assets is a theoretical interest rate that would be returned on an investment which is completely free of risk.

Risk Adjusted Performance

The Performance of security or investment relative to its risk is called Risk Free Adjusted Performance.

Procedure for Testing Hypothesis or Answer Research Questions

The procedure is used for the performance analysis of income Funds are

Sharp Ratio

Jensen’s Alpha

Treynor’s Measure

Sharp Ratio

In order to determine which portfolio offering the most favorable risk/return trade-off, we compute the ratio of the historical returns in excess of the risk-free rate to the standard deviation of the portfolio returns. 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

Sharpe ratio is used to measure ex-post portfolio performance.

Sharpe Ratio = ( - ) /

Where,

= the observed average fund return;

= the average risk free return;

= the standard deviation of fund returns.

This model is used to measure the performance of a managed portfolio in respect of return per unit of risk. This ratio also measures the portfolio manager’s ability on the basis of rate of return performance and diversification by taking into account total risk of the portfolio.

Treynor’s Ratio

Treynor model is used to measure the performance of a managed portfolio in respect of return per unit of risk (systemic risk). In this way the mutual fund provides the highest return per unit of risk (systemic risk) will be preferred as compared to the fund provides low return per unit of risk. 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 portfolio. This ratio measures the historical performance of managed portfolio in terms of return per unit of risk (systemic risk).

Treynor Ratio = ( - ) / β

Where,

= the observed average fund return;

= the average risk free return;

β = coefficient as a measure of systematic risk.

Treynor Ratio indicate that the portfolio offering the highest reward/risk (systemic risk) ratio will be the only risky portfolio in which investors will choose to invest.

The assumption is that the portfolio manager has diversified away the diversifiable risk (unsystematic risk/company specific risk) and the matter of concern for the investor should be the systematic risk (non-diversifiable/market risk) only, instead of total risk

Jensen Differential Measure

Jensen in 1969 introduced alpha (α) 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 portfolio.

Jensen measure is calculated as follows:

– = + [ – ]

Where,

= the observed returns of the portfolio

= the risk free returns

= the return on the market index

α and β = are the parameters of the model.

General Description of Data and Answering the Research Question

The results are presented and interpreted below with the help of tables.

Table 1- Fund Returns Vs Market Return

S.No

Fund Name & Year

2008

2008

2009

2009

2010

2010

AVG

AVG

1

Pakistan Income Fund

0.09

0.10

0.10

0.13

0.14

0.12

0.27

0.28

2

Faysal Income & Growth Fund

0.10

0.10

0.09

0.13

0.11

0.12

0.24

0.28

3

United Growth & Income Fund

0.08

0.10

0.10

0.13

0.10

0.12

0.22

0.28

4

HBL Income Funds

0.09

0.10

0.09

0.13

0.10

0.12

0.21

0.28

5

Askari Income Fund

0.09

0.10

0.12

0.13

0.02

0.12

0.18

0.28

6

JS Income Fund

0.10

0.10

0.11

0.13

(0.08)

0.12

0.06

0.28

Sample Average

0.09

0.10

0.12

0.13

0.06

0.12

0.21

0.28

Table 1 summaries the Returns of the funds (Rp) and Returns of the market (Rm) for three years. This table indicates that Pakistan Income Fund Performed 7% above the market on average where as in 2009 Askari Income Fund beats the market with highest return. United growth and Income fund beats the marker by 1% along with Js income Fund one of the oldest Fund underperformed the market by 15% . This indicates that experience of fund market does not guarantee their outperformance the Market. Askari income fund and JS Income fund could not maintain their performance successively for three years.

Table 2- Sharpe Ratio of Income Funds

 

 

Sharpe Ratio

S.No

Fund Name & Year

2008

2009

2010

AVG

Ranking

1

Pakistan Income Fund

(1.092)

0.461

0.479

0.576

1

2

Faysal Income & Growth Fund

0.004

(0.433)

(0.070)

(0.501)

2

3

JS Income Fund

(0.011)

(0.051)

(0.506)

(0.560)

3

4

United Growth & Income Fund

(0.461)

(0.160)

(0.295)

(0.609)

4

5

HBL Income Funds

(0.829)

(0.211)

(0.297)

(0.784)

5

6

Askari Income Fund

(1.556)

(1.211)

(1.326)

(3.055)

6

Sample Average

(0.657)

(0.267)

(0.336)

(0.822)

The Table 2 indicates that sample average Sharp ratio is (0.822). It indicates that industry has generated negative risk premium return of (0.822%) per unit of total risk taken by the funds. The highest average risk premium return earned is by the Pakistan Income Fund 0.576% but it has generated negative risk premium return (1.092) in 2008.This ratio find out the fund manager’s performance with respect to return as well as diversification. Investor should select funds which have a dependable history of earning higher risk premium based on multi year comparison based on proposed duration of investment. Short term investors should focus on the yearly sharp ratio where as long term investor should focus on average Sharp Ratio of the firm over the years. Five funds could not perform well and lost on the basis of the total risk in the three year time period .One of the oldest fund Askari income fund ranked lowest as it lost (3.055).

Table 3- Treynor’s Ratio of Income Funds

Treynor’S Ratio

S.No

Fund Name & Year

2008

2009

2010

AVG

Ranking

1

Pakistan Income Fund

0.073

1.470

0.977

2.471

1

2

Askari Income Fund

0.591

1.934

(0.149)

1.982

2

3

United Growth & Income Fund

(0.337)

1.499

(0.142)

1.245

3

4

JS Income Fund

(0.003)

0.747

(0.335)

0.412

4

5

HBL Income Funds

(0.051)

1.711

(1.488)

0.206

5

6

Faysal Income & Growth Fund

0.003

0.622

(0.680)

(0.057)

6

Sample Average

0.05

1.33

(0.30)

1.04

The Table 3 indicates the Treynor’s measure of Income Funds of the sample. The industry average is 1.04. Five funds could beat the market on both diversification and reduction in unique risk of the fund. Ideally in well diversified portfolio Sharp Ratio and Treyon’s Ratio should be same but in the Sample no funds had the same value of both ratios indicating lack of complete diversification on part of the portfolio managers. They are not reducing the risk for investors. The most diversified fund in sample is Pakistan Income Fund followed by Askari Income Fund, United Growth & Income Funds. Faysal Income & growth Fund had negative beta which resulted in a lower Treynor’s value.

Table 4- Jensen’s Alpha of Income Funds

Jensen’s Alpha

S.No

Fund Name & Year

2008

2009

2010

AVG

Ranking

1

Pakistan Income Fund

(0.007)

0.075

0.024

0.096

1

2

United Growth & Income Fund

(0.015)

0.034

(0.024)

0.004

2

3

Faysal Income & Growth Fund

(0.000)

(0.036)

(0.005)

(0.042)

3

4

HBL Income Funds

(0.007)

(0.042)

(0.024)

(0.068)

4

5

Askari Income Fund

0.005

(0.007)

(0.099)

(0.104)

5

6

JS Income Fund

(0.002)

(0.014)

(0.207)

(0.222)

6

Sample Average

(0.004)

0.002

(0.056)

(0.056)

The industry average for 2009 in Table 4 shows a positive Jensen’s Alpha of 0.002.This indicate that fund managers are able to pick up securities and time the market in such a way that they are able to earn positive income the industry was able to beat market return by 0-002 percent per anum. The overall three years Jensen Alpha in negative (0.056) due to UIGF, HBL, AIF and Js Income Fund. Askari Income Fund and United Growth & income fund beats the market by 0.005% and 0.034% points respectively. Two top funds out off six funds are subsidiaries of Large Banks of Pakistan that there experience of bonds market helping them to generating higher return despite less time of operation in income funds.

Summary of Findings

Table 5- Summarized Rankings of Income Funds Performance

S. No

Fund Name

Return on Portfolio

Sharp Ratio

Treynor’s Ratio

Jensen’s Alpha

1

Pakistan Income Fund

1

1

1

1

2

Faysal Income & Growth Fund

2

2

6

3

3

United Growth & Income Fund

3

4

3

2

4

HBL Income Funds

4

5

5

4

5

Askari Income Fund

5

6

2

5

6

JS Income Fund

6

3

4

6

Table 5 lists the summary ranking of the entire sample Income funds on the basis of Return on Portfolio, Sharp Ratio, Treynor’s ratio and Jensen’s Alpha. The fund with highest retruns significantly lags behind when its return is adjusted for risk. This indicates that the investors should not only look for the return but also for the risk involved in it. Risk and Return analysis will result in a decision of investing a fund which will have strong tendency of generating highest possible return with lowest possible risk. This characteristic is indicated by Js Income fund which equals the market return in 2008 with low risk while Pakistan Income funds could maintain its performance successively for three years but its risk is higher in all funds.

Discussion

After thorough study and analysis of data it is observed that performance of the income funds needs various challenges to face in the market to increase the return, decrease the risk and portfolio diversification.

Askari Income fund performed 2% above the market on average in 2004 to 2007 research while present study indicates that performance of the fund is not satisfactory in 2010 because sharp ratio of sample is (3.055) on average. Only Pakistan Income fund individually performed well in 2010 by generation 2% above the market after adjusting the risk as it is shown by positive Sharpe ratio in 2009 and 2010. The future of PIF is bright based on its performance sustainability.

Average Treynor ratio of the sample is positive which indicates that funds outperformed with the market. The results do not include the management fee which is a norm of the industry. If we deducted 1.5% management fees, the sample underperform the market on average by .50%. This highlights’ the importance of index funds in the Mutual Funds of Pakistan as management fees are reduced to minimal level by mimicking the market.

Implication

It has been proved that historical performance of a fund does not guarantees its future performance. It is based on knowledge of market, diversification of portfolio as changes in economy and ability to adjust or maintain the portfolio’s risk. The only consideration for return is not enough for better performance of fund, risk is one of important part of any portfolio which effects directly to its performance therefore manager should have knowledge about market fluctuation so that manager can able to pick up securities and time the market in such a way that they are able to generate positive income.

Treynor ratio on overall income funds is 1.04 risk premium of one percent of systematic risk show reasonable risk premium per one percent of systematic risk. If the diversifiable risk which is company specific is fully diversified away by the funds portfolio manager, the result of Sharp ratio and Treynor ratio are same. The Sharpe ratio and Treynor Ratio of present study are not same. We can say that funds are facing the diversification problem that is why the results of both ratios are not same.

The industry was able to beat .005% per annum in the end of 2007 but recent study average negative Jensen’s alpha (0.056) shows that 4 funds out off 6 underperformed because managers are not performing well to reduce the risk for investors. The investor should choose to invest in the portfolios highest reward/ low risk or highest reward/ highest risk with fully diversifiable portfolio with the change of market but choice of the portfolio is also based on investor ability to bear risk.

Conclusion

The research of Performance Analysis of Income fund concludes that returns of the funds are not the factual assessment of their presentation unless risk factors are accounted for returns. The investors should look for funds which have highest return with lowest risks to exploit their gain.

The returns of the funds over three years depicted the fact that performances in one year don’t indicate that they will give same results in future. It is clear that Income Funds in Pakistan can not guarantee future performance based on past outcome. We compare the returns of the funds with return on market and it proved the research question that Income Funds underperform the market by at least 50 basis points. This highlights the need of index funds in money market of Pakistan. Experience and knowledge of banks was not helpful in beating the market but it helped them to reduce their loss than other funds did not have such knowledge and experience.

Recommendations

It is recommended to the institutions that are in the market or planning to come in market should start index funds ( An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover) and risk adjusted returns should be emphasized. Investor should invest in funds which match their risk, return and duration.

Suggestions for Further Studies

There is lot of scope for progress in the research for evaluating income funds performance. Various other multi-criteria decisions models could be use for evaluating mutual fund performance. Long run testing of funds performance can also give best productivity. Portfolio risk throughout the measure of value at (Var) can also be tested for diversity in funds classes.

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