Predicting Pakistans’ Mutual Fund Performance: An Evaluation of Traditional and Modern Measures

Abstract

Mutual Funds enable small investors to benefit from the capital market with minimal investments, thanks to the expertise of professional managers. This study focuses on the Pakistani Mutual Fund industry and evaluates the suitability of traditional and multifactor asset pricing models in assessing Mutual Fund performance. Since multifactor models are rarely used in Pakistani research, this study employs the CAPM, Fama French, and Carhart models to assess the performance of Pakistan Mutual Funds. Data from 100 open-end Mutual Funds between 2005 and 2017 was collected from the Mutual Fund Association of Pakistan, while risk-free rates data was gathered from the State Bank of Pakistan and stock data from the Pakistan Stock Exchange. Ratio analysis, CAPM, Fama French-3 Factor, and Carhart-4 Factor models were used to analyze the data and determine which model was most suitable. The results indicate that the CAPM affects the market factors of the majority of portfolios. Conversely, the size factor, value factor, and momentum factor in the Fama French and Carhart models have an insignificant effect on the majority of portfolios. The Gibbon Rose Shanken test reveals that the CAPM model is the most suitable for evaluating Mutual Fund performance in Pakistan. The findings of this study have implications for asset management company managers and investors alike. It provides valuable insights into which funds perform better and which types of funds are ideal for investment.