Академический Документы
Профессиональный Документы
Культура Документы
On
Supervised By:
Sir Asif Mehmood
Submitted By:
Page |1
CHAPTER – 1
1.1 INTRODUCTION
Page |2
Since equity funds dominate the industry, growth in NAV is directly
attributable to the consistently strong performance of equity markets in
recent years. Some asset management companies have also introduced
other types of funds to cater to a wider variety of investor preferences.
1.2 BACKGROUND
In Pakistan, the evolution of Mutual Funds dates back to 1962, when the
public offering of National Investment Trust (NIT) was initially made
which is an open-end mutual fund. After 04 years i.e. in 1966 another
fund namely Investment Corporation of Pakistan (ICP) was established.
Since then ICP had been carrying the legal mandate, thus was free to
offer, a series of closed end mutual funds. Up to early 1990 this
institution had floated twenty six (26) closed-end ICP mutual funds. The
further journey of ICP ended in June 2000 during the revamping cum
restructuring-drive of the Govt. organizations , autonomous bodies &
corporation by the then caretaker Finance Minister Mr.Shoukat
Aziz.Revitilizing the privatization Commission of Pakistan the
Government started privatization of the ICP. Thus 25 out of 26 close-end
funds of the same were split into two lots. There had been a competitive
bidding for the acquisition of funds by various parties. Management
Right of Lot-A comprising 12 funds was acquired by ABAMCO Limited.
Later on out of these 12 the first 9 funds were merged into a single close-
end fund and subsequently were renamed as ABAMCO capital fund,
except 4 t h ICP mutual fund. The main known reason of not renaming the
4 t h ICP fund is the certificate holders of the same had not formally
approved the proposed scheme of the arrangement of Amalgamation into
ABAMCO capital fund in their extra ordinarily general meeting held on
December 20, 2003. The fund has therefore been recognized as a separate
close-end trust and named as ABAMCO growth fund. Rest of the three
funds were merged into another single and named as ABAMCO stock
market fund. On the other hand the Lot-B was comprised of 13 ICP
Page |3
funds, for all of these thirteen funds, the management Right was obtained
by PICIC Asset Management Company Limited. All of these thirteen funds
were merged into a single close-end fund which was renamed as “PICIC
Investment Fund”
The problem statement for this research is that “What is the Relationship
(Positive or negative) between Mutual Fund and GDP, GNP, Gross
Domestic Savings and Net inflow of Foreign Portfolio?”
The scope of this study is narrow, because we have select the duration
only ten years, i.e. 1997 – 2007, for checking the relationship between
mutual fund and GDP, GNP, gross domestic savings and net inflow of
foreign portfolio.
Page |4
this study is purely based on Secondary Data collected on annual basis
from different mutual funds in Pakistan. So the source is secondary in
nature.
Secondary Sources:
Official website of MUFAP
SBP annual report
Planning and Development Commission of Pakistan
Books
Journals
Page |5
Introduction to Mutual Funds, GDP, GNP, Gross Domestic Savings and
Net Inflow of Foreign Portfolio are discussed in this chapter.
Page |6
CHAPTER – 2
LITERATURE REVIEW
Cheema, Moeen and Sikander (2007) further advances the argument that
institutional investors, with special consideration to mutual funds has a
great potential to augment the corporate governance in emerging
economies. The regulatory framework & mechanism needs to be
restructured in a manner that would encourage the growth of the mutual
fund industry and enable it to play a nippy & upbeat role in corporate
governance matters. The paper reviews the regulation of mutual funds in
Pakistan in the light of the above propositions which is “The Role of
Mutual Funds and Non-Banking Financial Companies in Corporate
Governance in Pakistan.”
Sipra (2007) agrees that Mutual Funds are the most popular vehicle of
investing in the stock market and their performance evaluation is a theme
comparatively dear & easier both to/for the investors and researchers in
the field of Finanace. Astoundingly, mutual funds have not played a very
imperative character in Pakistani stock market and conceivably more or
less nothing has been in black and white about their performance in any
journal. The paper looked at the performance of Pakistani mutual funds
over the span of last five and ten year’s periods up to 2007. Sharp, Jensen
and Tenor measures of portfolio performance analysis had been utilized
therein. Both the performance of Mutual Funds & that of the market
portfolio defined as the Karachi Stock Exchange( KSE) 100 were
comparatively analyzed taking the later as the benchmark for the same,
by means of the Sharpe method giving the significant results that the
performance of practically all the funds was originated to be inferior to
Page |7
that of the market portfolio. The Jensen and Treynor measures showed
about 50% of the funds to be outperforming the market portfolio over the
last five years, but when the risk measure was corrected via Kama's net
selectivity measure the market portfolio outperformed all the funds except
one. These results supported the semi-strong form of market efficiency
hypothesis even more strongly than it has been demonstrated in the
developed markets.
Bams (2004) put forwards a synopsis of the Mutual Funds & Investigated
via a survivorship bias controlled sample of 506 funds from the five most
important countries of Europe. He had done another analysis using the
Carhart (1997) asset-pricing model of 04 Factors. Besides that they also
logically investigated that whether fund managers of Europe put on
display 'hot hands', attentiveness in performance. Finally the weight of
fund characteristic on risk adjusted performance is well thought-out. Their
overall fallout suggest that in European market for mutual funds, and
above all small cap funds are proficient to add value, as indicated by their
positive after cost intercepts. If on addition of some management fees,
four out of five countries exhibit significant out-performance at an
Page |8
aggregate level. Finally, they detected strong persistence in mean returns
for funds investing in the UK. Their result deviate form most US studies
that are of proposition that mutual funds under-perform the market to the
tune of expense they charge.
Malkeil and Radisich (2001) are of logical& cuasal findings that index
funds are consistently producing rates of return in excess of those
dynamic funds by 100 to 200 basis points per annum in the USA over the
decade of 1990s .They in-fact found two reasons for surfeit performance
i.e. by passive funds management fee and trading costs concerned .
Blake and Timmermann (1998) from the U niversity of California upon the
empirical analysis of performance of UK mutual funds concluded that the
average UK equity fund appeared to under perform by approximately 1.8
% per annum on risk adjusted basis. The authors are also of the stronger
proposition that there is also some indication of diligence of performance
on standard, a portfolio comprising of the traditionally & relatively best
performing quartile of mutual funds performs superior in the succeeding
period than a portfolio Composed of the historically worst performing
quartile of the same.
Grinblatt and Titman (1992) analyze performance of 279 funds over the
period of 1975 to 1984 using a benchmark technique and find evidence
that performance differences between funds persists over time. Hendricks,
Patel, and Zeckhauser (1993) study 165 no-load growth-oriented funds
over the period 1974 to 1988 and obtain similar results. In a study of 728
Page |9
mutual fund returns over the period 1976 to 1988, Goetzman and Ibbotson
(1994) find that two-year performance is predictive of performance over
the successive two years. Volkman and Wohar (1995) extend this analysis
to examine factors that impact performance persistence. Their data
consists of 322 funds over the period 1980 to 1989, and shows
performance persistence is negatively related to size and negatively
related to levels of management fees.
Carhart (1997) shows that expenses and common factors in stock returns
such as beta, market capitalization, one-year return momentum, and
whether the portfolio is value or growth oriented "almost completely"
explain short term persistence in risk-adjusted returns. He concludes that
his evidence does not "support the existence of skilled or informed mutual
fund portfolio managers" (Carhart, 1997, p. 57). In the Kahn and Rudd
1995 study of 300 equity funds and 195 bond funds between 1983 and
1993, only the bond funds show evidence of persistence. In an article in
this issue, Detzel and Weigand (1998) use a regression residual technique
to control for the effects of investment style, size and expense ratios.
They find, after controlling for these variables, no evidence of
performance persistence.
In Gruber (1996) in his article based on USA data claims that most of the
older studies are subject to survivorship bias. When this effect is adjusted,
is argued that mutual funds on average under-perform the market proxy by
the amount of expenses they charge the investors.
P a g e | 10
capitalisation.
Malkiel and Radisich (2001) finds that index funds have regularly
produced rates of return exceeding those of active funds by 100 to 200
basis points per annum in the United States over the 1990s and find that
there are two reasons for the excess performance by passive funds:
management fee and trading costs.
In 2004, Otten and Bams (2004) in article titled “How to measure mutual
fund performance: economic versus statistical relevance” says that the
majority of US studies conclude that actively managed portfolios, on
average, under perform market indices. He quoted the examples of the
studies conducted by Jensen (1968) and Sharpe (1966). He argued mutual
funds under perform the market by the amount of expenses they charge the
investors.
Shah and Hijazi (2005) Mutual Funds, which are actively managed,
generally under perform the market on average. This trend is more visible
in the money market funds where difference between market return, risk
P a g e | 11
free rate and fund performance is in the range of 1%. The low risk nature
of these investments as compared to equity funds result in lower return
which in turn leaves little or no room for management expenses. The
mutual fund industry of Pakistan is in growing stage.
Naim Sipra (2006) Equity Funds outperformed the market and positive
return after deducting costs. The funds also have the potential to add
value due to present lack of diversification indicated by the difference in
Sharpe and Treynor Ratios. The proportion of fund which are able to beat
the market in a given time period is low.
Malkiel and Radisich (2004) no fund was able to beat the market
consistently which indicate the semi strong form of market efficiency.
Index funds are able to beat the market by 100-200 basis points than the
actively managed funds. The major reasons for active funds
underperformance are management fees and trading costs.
P a g e | 12
evidence on US data indicates that ethical screening paves the way to
equaling or slightly reduced performance relative to analogous
unrestricted portfolios. Evidence on the performance of ethical mutual
funds is generally restricted to the US and UK markets. For UK market
four leading papers presented during the last decade. The early
comparative studies of ethical funds to market wide indices like the FT all
are shares index. By means of this methodology Luther, Matatko and
corner (1992) investigated the returns of 15 ethical unit trusts. Their
findings provided some weak substantiation that an ethical fund tends to
out perform general market indices.
P a g e | 13
CHAPTER – 3
The concept is very simple, small investors invest their money into a
common pool or fund and hand over the investment decision to fund
manager/ portfolio manager. This is expected to have several advantages
for the small investors: no more searching for good buys or relying on the
neighborhood sub-broker for advice or even waiting anxiously for the
allotment. All this is taken care of by the cumulative bargaining power of
the fund, which has trained professionals managing it.
Every day, the fund manager/ portfolio manager counts up the value of all
fund's holding, figures out how many shares have been purchased by
shareholders, and then calculates the Net Asset Value (NAV) of the
mutual fund, the price of a single share of the fund on that day. If you
P a g e | 14
want to buy shares, you just send the manager your money, and they will
issue new shares for you at the most recent price. If the fund manager is
doing good job, the NAV of the fund will usually get bigger your shares
will be worth more.
The history of mutual fund dates back to 19th century when the process of
pooling money for investing purposes started in Europe in 1868. Similar
practices are reported even in the time of Egyptian and Phoenicians when
they tried to minimize their risk by selling shares to caravans and vessels
(Finance India 1996). The first mutual fund appeared on the floor of
financial market in 1893 when formation of a faculty fund came into being
for Harvard University staff. It was like close-end Mutual Fund. The first
official open end mutual fund took birth on March 21, 1924 when two
broker (Hatherly Foster and Charles Earoyd) pooled their $50,000 as seed
money in Boston, Massachusetts to form an investment trust. This fund
got popularity because of liquidity and ease in use.
P a g e | 15
Sovereign Fund, Meezan Islamic Fund, Unit Trust of Pakistan, UTP
Income Fund, UTP Islamic Fund and United Money Market Fund in
private sector.
• GROWTH FUNDS
• BALANCED FUNDS
• INCOME FUNDS
GROWTH FUNDS
The "growth funds" offer potential for appreciation in share value, while
the current income may be low. The fluctuation in share price may also be
high. Such funds invest in stocks and have tendency to outperform other
funds and other modes of savings over a period of time.
BALANCED FUNDS
The "growth and income funds" or "balanced funds", offer prospects of
both moderate appreciations in share value as well as current income. The
fluctuation in share price may be low. Such funds invest in stocks,
corporate debts and Government paper.
INCOME FUNDS
The "bond fund" or "income funds", offer good current income but very
little potential for growth. Such funds invest in government paper, bonds
issued by municipal or local bodies, corporate debts and in stocks of
utility companies, offering regular return.
P a g e | 16
3.4 SOURCES OF PROFIT GENERATION:
A mutual fund can generate profits from three different sources, which
are:
• Dividend
• Capital Gains
• Appreciation of Share Price
Dividend:
Mutual fund generates income from dividends received from other joint
stock companies whose shares the fund holds. A mutual fund uses this
dividend income to distribute dividend to its own stock holders.
Capital Gains:
As discussed earlier the portfolio manager changes the portfolio of the
fund with the passage of the time and also with the changes in economic
and business conditions. So due to the sale and purchase of shares, the
mutual fund generates capital from the sales/ purchase of stocks. The
capital gain generated by the mutual fund is also used to pay dividends to
the investors of the fund.
P a g e | 17
• Mutual Funds substantially lower the investment risk of small
investors through diversification in which funds are spread out into
various sectors, companies, securities as well as entirely different
markets. It is always the objectives of a fund manager to maximize
a funds return for a given level of risk, however the dangers of
"over-diversification" are always prevalent which would inevitably
lead to a reduced return on the portfolio.
• Mutual Funds mobilize the saving of small investors and channel
them into lucrative investment opportunities. As a result, mutual
funds add liquidity to the market. Moreover, given that the funds
are long term investment vehicles, they reduce market volatility by
offering support to scrip prices.
• Mutual Funds are providing the small investor access to the whole
market which individually, would be difficult to achieve.
• The investors save a great deal in transaction cost given that he has
access to a large number of securities by purchasing a single share
of mutual fund.
• The investors can pick and choose a mutual fund to match his
particular needs.
P a g e | 18
3.6 HISTORICAL REVIEW OF MUTUAL FUNDS IN PAKISTAN
The history of mutual fund dates back to 19th century when the process of
pooling money for investing purposes started in Europe in 1868. Similar
practices are reported even in the time of Egyptian and Phoenicians when
they tried to minimize their risk by selling shares to caravans and vessels
(Finance India 1996). The first mutual fund appeared on the floor of
financial market in 1893 when formation of a faculty fund came into being
for Harvard University staff. It was like close-end Mutual Fund. The first
official open end mutual fund took birth on March 21, 1924 when two
broker (Hatherly Foster and Charles Earoyd) pooled their $50,000 as seed
money in Boston, Massachusetts to form an investment trust. This fund
got popularity because of liquidity and ease in use.
Mutual Funds world wide assets have crossed the limit of $25.82 trillion
showing a growth of 1.6% p.a. USA is dominant over the whole mutual
fund market with holding of 50% assets ($11.742 trillion) of the world’s
mutual fund market. Mutual Funds of United Kingdom (UK) holds about
$852 Billion assets.
P a g e | 19
mutual fund sector in India is a mirror reflection of that in Pakistan as far
as historical developments are concerned, Comparison of India and
Pakistan’s Mutual Fund industry is given in the following table:
Table : 3.1
S/No. INDICATOR PAKISTAN INDIA
1 Net Assets Under Management Rs. 385 billion Rs. 2,318 billion
(2008)
2 Net Assets value / GDP (2007) 4% 8%
3 NAV / Bank Deposits 11% 20%
4 Number of Assets Management 29 41*
Companies
5 Number of Mutual Funds (Schemes 90 5763*
in India)
6 Individual/Retail Investors (%age of 45 45 #
assets ownership
7 Corporate Investors (%age of assets 55 60 #
ownership
*www.mutualfundsindia.com
#
http://in.rediff.com/money/2005/jan/07nri1.htm
P a g e | 20
Number of investors in NIT that holds collectively 749 millions units are
53500 (NIT 2007). Government support was one of the major components
that helped NIT to keep its promises of high returns to investors (NIT
1992) but this policy was discontinued when Pakistan started to follow
economic reforms in 1990s. NIT had equity stakes in many government
owned entities that was privatized following the financial reforms in
Pakistan and made it leader in mutual fund market.
P a g e | 21
most important incentive for investing in mutual funds. Besides
professional management, mutual funds offer a diversified investment
portfolio that helps to reduce exposure risks for individual investors and
allows sharing of transaction costs among all investors.
The mutual funds sector has grown rapidly in the last few years ( Figure 1)
and accounted for the largest chunk of 55.3 percent in total assets of the
non‐bank financial sector in FY07. Between FY02 to FY07, net assets of
mutual funds have grown by more than 13 times to reach Rs. 330 billion
by the close of FY07. The average payout of the mutual funds industry
also grew to 18.0 percent in FY07 (22.1 percent in FY06), as illustrated in
Figure 2.
P a g e | 22
The growth in mutual funds in Pakistan is attributable to: (i) liberalization
of the sector; (ii) economic growth and macroeconomic stability that
attracted investors, including foreign investors, to the stock market; (iii)
increased liquidity with institutional investors, which was channelized
into the stock market and mutual funds; (iv) high corporate earnings that
increased the earnings potential for mutual funds; and (v) a buoyant stock
market that provided mutual funds with good returns in the form of capital
gains. Historically, the industry was dominated by public sector funds.
However, creation of an enabling legal framework to allow mutual funds
to be set up in the private sector and transfer of ICP‐managed closed end
funds to two private sector investment advisers in FY03 boosted the
number and size of funds under the management of the private sector,
increased competition and efficiency of the sector and enhanced the
P a g e | 23
quality of fund management. It also provided opportunity to financial
institutions, like banks and brokerage firms, to diversify into fund
management through subsidiaries and associated companies. As may be
seen from Table 3.3, the share of private sector funds in the sector has
grown from 10.0 percent to over 79.2 percent over the last six years or so.
The public sector open ‐end mutual fund, NIT, by its sheer size continues
to have a significant share of 31.0 percent in the net assets of the sector.
P a g e | 24
the continuous sale and redemption of certificates by a closed ‐end fund,
investors can only exit the fund at the given market price of the
shares/certificates in the stock market, which is generally at a discount to
the NAV per share/certificate. However, lack of redemption pressure has
its advantages for the closed‐end fund, particularly with respect to the
ability to invest in illiquid, but high‐potential small and medium‐sized
companies to earn high returns, optimizing investment of assets by
maintaining low liquidity and saving on marketing and distribution costs.
P a g e | 25
3.7 Types of Mutual Funds in Pakistan
Each mutual fund has specific investment objectives that mould the fund’s
assets, investment options and strategy. At the most basic level, there are
three types of mutual funds: (i) Equity funds, ii) Fixed ‐income funds, and
iii) Money Market funds. All the other kinds of mutual funds are
variations of these three basic types. The characteristics of the various
types of funds are detailed below:
P a g e | 26
asset allocation with investments in a variety of fund categories that all
are wrapped up into one fund. Due to diversification, these funds are less
volatile with moderate correlation with market.
Income Fund: A type of mutual fund that emphasizes current income,
either on a monthly or quarterly basis, as divergent from targeting capital
appreciation. These funds hold a variety of government, municipal and
corporate debt obligations, preferred stock, money market instruments and
dividend paying stocks. Generally, these funds are least volatile with
weak correlation with market.
Balanced Fund: Mutual funds that combine investments in shares, short ‐
term and long‐term bonds in pursuit of income gains and capital
appreciation while avoiding excessive risk. These are also called hybrid
funds. The idea behind this concept is to provide investors with a single
mutual fund that combines income and growth objectives, by investing in
both stocks and bonds. Due to diversification, these funds are less volatile
with moderate correlation with market.
Equity Fund: A mutual fund that invests principally in stocks is called
equity fund. It is also known as a “stock fund”.
This type of fund can be further categorized into two categories, i.e.
domestic and international, depending on the nature of investments of the
fund. Generally, these funds are very volatile with strong correlation with
the market.
Sector Fund: A mutual fund that invests entirely or predominantly in a
specified (single) sector is a sector specific fund. These funds usually
exist in energy, gold, and other precious metals sectors. The risk
associated with these funds depends on the specified sector. These types
of funds are less diversified. The volatility and correlation with market
also depends on the specified sector.
Islamic Funds: A type of fund which entirely invests in Shariah
compliant instruments. Islamic funds exist in almost all the forms
discussed earlier. Each fund invests in its respective areas of interest
P a g e | 27
keeping in view the rules of shariah compliance. The volatility of each
kind of Islamic fund depends on its category and also the relationship with
the market in which it operates.
P a g e | 28
currency funds) subject to a cap of US$ 15 million, whichever is lower.5
Prior approval of SBP is required by a mutual fund seeking to invest
outside Pakistan. In order to manage associated risks, SECP generally
requires fund managers to observe certain conditions vis‐à‐vis
international investments. The permission to invest abroad has been
welcomed by the mutual funds sector as it would enable them to diversify
investments outside Pakistan.
The most direct of the three is the product approach, which sums the
outputs of every class of enterprise to arrive at the total. The expenditure
approach works on the principle that all of the product must be bought by
somebody, therefore the value of the total product must be equal to
people's total expenditures in buying things. The income approach works
on the principle that the incomes of the productive factors ("producers,"
P a g e | 29
colloquially) must be equal to the value of their product, and determines
GDP by finding the sum of all producers' incomes.
Example: the expenditure method:
"Domestic" means that GDP measures production that takes place within
the country's borders. In the expenditure-method equation given above,
the exports-minus-imports term is necessary in order to null out
expenditures on things not produced in the country (imports) and add in
things produced but not sold in the country (exports).
P a g e | 30
directed (in mainstream economic models) to increases in long-term
private consumption.
• If separated from endogenous private consumption, government
consumption can be treated as exogenous,[citation needed] so that
different government spending levels can be considered within a
meaningful macroeconomic framework.
P a g e | 31
producer units = Gross output - intermediate consumption of goods
and services to produce the output.
For market producer sales is usually the largest part of output. But
producer units may also produce output for own final use (own final
consumption or own gross fixed capital formation) or add their output of
goods to their inventories.
If taxes and subsidies have not already been computed as part of GVA, we
must compute GDP as:
EXPENDITURE APPROACH
P a g e | 32
COMPONENTS OF GDP BY EXPENDITURE
Y = C + I + G + (X − M)
P a g e | 33
• G (government spending) is the sum of government expenditures
on final goods and services. It includes salaries of public servants,
purchase of weapons for the military, and any investment
expenditure by a government. It does not include any transfer
payments, such as social security or unemployment benefits.
• X (exports) represents gross exports. GDP captures the amount a
country produces, including goods and services produced for other
nations' consumption, therefore exports are added.
• M (imports) represents gross imports. Imports are subtracted since
imported goods will be included in the terms G, I, or C, and must
be deducted to avoid counting foreign supply as domestic.
Y = FCE + G CF + (X − M)
P a g e | 34
According to the U.S. Bureau of Economic Analysis, which is responsible
for calculating the national accounts in the United States, :In general, the
source data for the expenditures components are considered more reliable
than those for the income components.
P a g e | 35
INCOME APPROACH
P a g e | 36
The sum of COE, GOS and GMI is called total factor income; it is the
income of all of the factors of production in society. It measures the value
of GDP at factor (basic) prices. The difference between basic prices and
final prices (those used in the expenditure calculation) is the total taxes
and subsidies that the government has levied or paid on that production.
So adding taxes less subsidies on production and imports converts GDP at
factor cost to GDP (I).
GDP = R + I + P + SA + W
where R : rents
I : interests
P : profits
SA : statistical adjustments (corporate income taxes, dividends,
undistributed corporate profits)
W : wages
Note the mnemonic, "ripsaw".
P a g e | 37
All output for market is at least in theory included within the boundary.
Market output is defined as that which is sold for "economically
significant" prices; economically significant prices are "prices which have
a significant influence on the amounts producers are willing to supply and
purchasers wish to buy." An exception is that illegal goods and services
are often excluded even if they are sold at economically significant prices
(Australia and the United States exclude them).
P a g e | 38
Non market outputs that are included within the boundary are listed
below. Since, by definition, they do not have a market price, the compliers
of GDP must impute a value to them, usually either the cost of the goods
and services used to produce them, or the value of a similar item that is
sold on the market.
P a g e | 39
the services. According to the United States Bureau for Economic
Analysis, this is one of the largest imputed items in the GDP.
To take the United States as an example, the U.S.'s GNP is the value of
output produced by American-owned firms, regardless of where the firms
are located.
Gross national income (GNI) equals GDI plus income receipts from the
rest of the world minus income payments to the rest of the world.
In 1991, the United States switched from using GNP to using GDP as its
primary measure of production. The relationship between United States
GDP and GNP is shown in table 1.7.5 of the National Income and Product
Accounts.
International standards
The international standard for measuring GDP is contained in the book
System of National Accounts (1993), which was prepared by
P a g e | 40
representatives of the International Monetary Fund, European Union,
Organization for Economic Co-operation and Development, United
Nations and World Bank. The publication is normally referred to as
SNA93 to distinguish it from the previous edition published in 1968
(called SNA68)
National measurement
Within each country GDP is normally measured by a national government
statistical agency, as private sector organizations normally do not have
access to the information required (especi ally information on expenditure
and production by governments).
Interest rates
ADJUSTMENTS TO GDP
P a g e | 41
2000 GDP to its 1990 GDP we could multiply the 2000 GDP by one-half,
to make it relative to 1990 as a base year. The result would be that the
2000 GDP equals $300 million x one-half = $150 million, in 1990
monetary terms. We would see that the country's GDP had, realistically,
increased by 1.5 times over that period, not 3 times, as it might appear
from the raw GDP data. The GDP adjusted for changes in money-value in
this way is called the real, or constant, GDP.
The factor used to convert GDP from current to constant values in this
way is called the GDP deflator. Unlike the Consumer price index, which
measures inflation (or deflation – rarely!) in the price of household
consumer goods, the GDP deflator measures changes in the prices all
domestically produced goods and services in an economy – including
investment goods and government services, as well as household
consumption goods.
Real GDP growth rate for year n = [(Real GDP in year n) - (Real
GDP in year n - 1)]/ (Real GDP in year n - 1)
P a g e | 42
CROSS-BORDER COMPARISON
• The current exchange rate method converts the value of goods and
services using global currency exchange rates. The method can offer
better indications of a country's international purchasing power and
relative economic strength. For instance, if 10% of GDP is being
spent on buying hi-tech foreign arms, the number of weapons
purchased is entirely governed by current exchange rates, since
arms are a traded product bought on the international market. There
is no meaningful 'local' price distinct from the international price
for high technology goods.
• The purchasing power parity method accounts for the relative
effective domestic purchasing power of the average producer or
consumer within an economy. The method can provide a better
indicator of the living standards of less developed countries,
because it compensates for the weakness of local currencies in the
international markets. For example, India ranks 12th by nominal
GDP, but fourth by PPP. The PPP method of GDP conversion is
more relevant to non-traded goods and services.
P a g e | 43
There is a clear pattern of the purchasing power parity method decreasing
the disparity in GDP between high and low income (GDP) countries, as
compared to the current exchange rate method. This finding is called the
Penn effect.
P a g e | 44
living. For instance, in an extreme example, a country which exported 100
per cent of its production and imported nothing would still have a high
GDP, but a very poor standard of living.
P a g e | 45
Unpaid work conducted on Free and Open Source Software (such as
Linux) contributes nothing to GDP, but it was estimated that it
would have cost more than a billion US dollars for a commercial
company to develop. Also, if Free and Open Source Software
became identical to its proprietary software counterparts, and the
nation producing the propriety software stops buying proprietary
software and switches to Free and Open Source Software, then the
GDP of this nation would reduce, however there would be no
reduction in economic production or standard of living. The work of
New Zealand economist Marilyn Waring has highlighted that if a
concerted attempt to factor in unpaid work were made, then it would
in part undo the injustices of unpaid (and in some cases, slave)
labor, and also provide the political transparency and accountability
necessary for democracy. Shedding some doubt on this claim,
however, is the theory that won economist Douglass North the
Nobel Prize in 1993. North argued that the creation and
strengthening of the patent system, by encouraging private
invention and enterprise, became the fundamental catalyst behind
the Industrial Revolution in England.
• Underground economy – Official GDP estimates may not take into
account the underground economy, in which transactions
contributing to production, such as illegal trade and tax-avoiding
activities, are unreported, causing GDP to be underestimated.
• Non-monetary economy – GDP omits economies where no money
comes into play at all, resulting in inaccurate or abnormally low
GDP figures. For example, in countries with major business
transactions occurring informally, portions of local economy are not
easily registered. Bartering may be more prominent than the use of
money, even extending to services (I helped you build your house
ten years ago, so now you help me).
• GDP also ignores subsistence production.
P a g e | 46
• Quality improvements and inclusion of new products – By not
adjusting for quality improvements and new products, GDP
understates true economic growth. For instance, although computers
today are less expensive and more powerful than computers from
the past, GDP treats them as the same products by only accounting
for the monetary value. The introduction of new products is also
difficult to measure accurately and is not reflected in GDP despite
the fact that it may increase the standard of living. For example,
even the richest person from 1900 could not purchase standard
products, such as antibiotics and cell phones, that an average
consumer can buy today, since such modern conveniences did not
exist back then.
• What is being produced – GDP counts work that produces no net
change or that results from repairing harm. For example, rebuilding
after a natural disaster or war may produce a considerable amount
of economic activity and thus boost GDP. The economic value of
health care is another classic example—it may raise GDP if many
people are sick and they are receiving expensive treatment, but it is
not a desirable situation. Alternative economic estimates, such as
the standard of living or discretionary income per capita try to
measure the human utility of economic activity. See uneconomic
growth.
• Externalities – GDP ignores externalities or economic beds such as
damage to the environment. By counting goods which increase
utility but not deducting beds or accounting for the negative effects
of higher production, such as more pollution, GDP is overstating
economic welfare. The Genuine Progress Indicator is thus proposed
by ecological economists and green economists as a substitute for
GDP, supposing a consensus on relevant data to measure "progress".
In countries highly dependent on resource extraction or with high
ecological footprints the disparities between GDP and GPI can be
P a g e | 47
very large, indicating ecological overshoot. Some environmental
costs, such as cleaning up oil spills are included in GDP.
• Sustainability of growth – GDP is not a tool of economic
projections, which would make it subjective, it is just a
measurement of economic activity. That is why it does not measure
what is considered the sustainability of growth. A country may
achieve a temporarily high GDP by over-exploiting natural
resources or by misallocating investment. For example, the large
deposits of phosphates gave the people of Nauru one of the highest
per capita incomes on earth, but since 1989 their standard of living
has declined sharply as the supply has run out. Oil-rich states can
sustain high GDPs without industrializing, but this high level would
no longer be sustainable if the oil runs out. Economies experiencing
an economic bubble, such as a housing bubble or stock bubble, or a
low private-saving rate tend to appear to grow faster owing to
higher consumption, mortgaging their futures for present growth.
Economic growth at the expense of environmental degradation can
end up costing dearly to clean up.
• One main problem in estimating GDP growth over time is that the
purchasing power of money varies in different proportion for
different goods, so when the GDP figure is deflated over time, GDP
growth can vary greatly depending on the basket of goods used and
the relative proportions used to deflate the GDP figure. For
example, in the past 80 years the GDP per capita of the United
States if measured by purchasing power of potatoes, did not grow
significantly. But if it is measured by the purchasing power of eggs,
it grew several times. For this reason, economists comparing
multiple countries usually use a varied basket of goods.
• Cross-border comparisons of GDP can be inaccurate as they do not
take into account local differences in the quality of goods, even
when adjusted for purchasing power parity. This type of adjustment
P a g e | 48
to an exchange rate is controversial because of the difficulties of
finding comparable baskets of goods to compare purchasing power
across countries. For instance, people in country A may consume
the same number of locally produced apples as in country B, but
apples in country A are of a more tasty variety. This difference in
material well being will not show up in GDP statistics. This is
especially true for goods that are not traded globally, such as
housing.
• Transfer pricing on cross-border trades between associated
companies may distort import and export measures.
• As a measure of actual sale prices, GDP does not capture the
economic surplus between the price paid and subjective value
received, and can therefore underestimate aggregate utility.
CHAPTER – 4
RESEARCH METHODOLGY
P a g e | 49
This chapter addresses the approach to the study. It provides an
explanation of the research design, details regarding the variables to be
examined and means of data collection. The purpose of this research was
to check the performance of mutual funds industry of Pakistan during the
period 1996 – 97 to 2006 – 07.
P a g e | 50
We have selected GDP, GNP, domestic saving and Net Inflow of Foreign
Portfolio Investment as independent variables because of following
reasons.
1. Availability of Data
Since the web sites of SBP & Ministry of Finance are instantly
accessible contain the historically reliable & refined secondary data
related to GDP, GNP & Domestic Savings. While the official Web Page
of MUFAP has updated record of NIFP. Thus the data regarding these
variables are available through many sources, that’s why we have
selected these variables with a sole research objective to reach a
logical & unbiased conclusion.
2. Shortage of Time
The efficient utilization of scarced time resources was another factor to
select variables whose availability, processing, refinement require
lesser time
3. Quantitative nature of Data
Since the research is of quantitative nature & needing more
precision & accuracy which can tested, verified, evaluated through
many of the available statistaical tools.
P a g e | 51
CHAPTER – 5
DATA ANALYSIS
This part of research provides analysis of the data. The data is analyzed
through econometric techniques. A model was specified and estimated
using SPSS.
Variables Variables
Model Entered Removed Method
1 GDPa . Enter
a. All requested variables entered.
b. Dependent Variable: M.F
Model Summary
P a g e | 52
ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 28512.085 1 28512.085 63.870 .000 a
Residual 3571.281 8 446.410
Total 32083.366 9
a. Predictors: (Constant), GDP
b. Dependent Variable: M.F
Coefficientsa
Standardi
zed
Unstandardized Coefficien
Coefficients ts
Model B Std. Error Beta t Sig.
1 (Constant) -341.315 50.771 -6.723 .000
GDP 1.061E-04 .000 .943 7.992 .000
a. Dependent Variable: M.F
Interpretation
Model:
Regression
P a g e | 53
b
Variables Entered/Removed
Variables Variables
Model Entered Removed Method
1 GNPa . Enter
a. All requested variables entered.
b. Dependent Variable: M.F
Model Summary
ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 27494.903 1 27494.903 47.937 .000 a
Residual 4588.463 8 573.558
Total 32083.366 9
a. Predictors: (Constant), GNP
b. Dependent Variable: M.F
Coefficientsa
Standardi
zed
Unstandardized Coefficien
Coefficients ts
Model B Std. Error Beta t Sig.
1 (Constant) -79.796 21.688 -3.679 .006
GNP 2.706E-05 .000 .926 6.924 .000
a. Dependent Variable: M.F
Interpretation:
Model:
P a g e | 54
This regression result shows the relationship between mutual fund and
GNP. It is much clear from the value of R, which show the relatedness of
both the variables that these variables are 92.6 % related. The above
model describes the scenario by 85.7%. If we talk about the significance
so both the variables t & F values are significant.
b
Variables Entered/Removed
Variables Variables
Model Entered Removed Method
1 GDSa . Enter
a. All requested variables entered.
b. Dependent Variable: M.F
Model Summary
ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 22076.286 1 22076.286 17.649 .003 a
Residual 10007.080 8 1250.885
Total 32083.366 9
a. Predictors: (Constant), GDS
b. Dependent Variable: M.F
P a g e | 55
Coefficientsa
Standardi
zed
Unstandardized Coefficien
Coefficients ts
Model B Std. Error Beta t Sig.
1 (Constant) -422.861 115.697 -3.655 .006
GDS 1.269E-03 .000 .830 4.201 .003
a. Dependent Variable: M.F
Interpretation:
Model:
Talking about the above regression result, it shows the mutual fund and
domestic saving relationship. From the value of R, i.e. 83%, it is clear the
both the variables mutual fund and domestic savings are related to 83%.
The scenario is 68 % explain form the model. Also both the variables t &
F are significant, as for as the significant is concerned. i.e. t = 4.201 and
F = 17.649
Regression
b
Variables Entered/Removed
Variables Variables
Model Entered Removed Method
1 NIFPa . Enter
a. All requested variables entered.
b. Dependent Variable: M.F
P a g e | 56
Model Summary
ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 12850.648 1 12850.648 5.345 .050 a
Residual 19232.718 8 2404.090
Total 32083.366 9
a. Predictors: (Constant), NIFP
b. Dependent Variable: M.F
Coefficientsa
Standardi
zed
Unstandardized Coefficien
Coefficients ts
Model B Std. Error Beta t Sig.
1 (Constant) 37.426 18.536 2.019 .078
NIFP .259 .112 .633 2.312 .050
a. Dependent Variable: M.F
Interpretation:
Model:
The above regression result shows the mutual fund and net inflow of
foreign portfolio relationship. The value of R, i.e. 63%, shows the
relationship between mutual fund and NIFP that both the variables are
related. And if we talk about the model, so it explaining the scenario by
40%, and the significance of both the variables so it is clear from the
values the both the variables are significant.
P a g e | 57
CHAPTER – 6
FINDINGS & CONCLUSION
I n th is chapter the res earcher dis cuss ed the findings of the s tudy an d
co n cluded thes e findings .
6.1 FINDINGS
• The mutual fund and GDP are 94% related, also shows the
significance of both the variables that t & F are significant. The
value of t = 6.924 while value of F = 47.937 which shows the
significance. The coefficient of determination is 88.9% which
explaining the model. There is a positive relation between Mutual
Fund and GDP, as 1 unit increase in GDP increases 0.633 unit
increase in mutual fund as well as in the absence of GDP, the
mutual fund loose it value.
• The mutual fund and GNP are 92.6% related, the t & F values shows
the significance i.e. t = 6.924, F = 47.937. The r 2 which is
coefficient of determination explaining the scenario by 85.7%. Here
also the relation between mutual fund and GNP is positive and 1
unit increase in GNP increases 0.926 units increase in mutual fund.
Here also the absence of GNP, the mutual fund will loose it value.
• The variables mutual fund which is dependent and gross domestic
P a g e | 58
savings which is independent both are related 83%, and as for as the
significance is concerned so both t & F are significant, i.e. t = 4.201
& F =17.649. The coefficient of determination r 2 in case of mutual
fund and gross domestic savings explaining the situation by 68%. In
this case the relation is also positive. That 1 unit increase in GDS
will increase mutual fund by 0.830 units.
• In case of mutual fund and net inflow of foreign portfolio, the
relation is positive and both of these variables are related by 63%
and if we talk about the “t” & “F” so both the values are
significance, i.e. t = 2.312 & F = 5.345. The model is explaining the
scenario by 40%.
6.2 CONCLUSION
The linear regression was used to compute the relationship between the
dependant and independent variables. First regression was carried out in
between Mutual Fund and GDP. The values of “t” & “F” show the
significance level between these variables. The correlation of Mutual
Fund and Domestic Saving are also tested and established that the result
are statistically significant at the preferred level of significance which
implies that these two variables have positive relationship with the Mutual
P a g e | 59
Fund. Also in the case of Mutual Fund and GNP the results are significant
from the values of “t” & “F”. While in the case of Mutual Fund and Net
Inflow of Foreign Portfolio Investment the result indicates that the
computed value of “t” & “F” are also statistically significant. This
Phenomenon also scientifically implies that majority of the foreign
portfolio investment is at one hand bound to a small number of shares in
the stock market or the foreign portfolio investors do not perceive
Pakistani financial markets as preferred choice for investment &
diversification to minimize risk. This may also point to the fact & causal
relationships of inconsistency in monitory & fiscal policies, manipulation
by the regulator, extremely volatile capital market besides the fluctuating
geo- political conditions. Pakistan may not be a striking choice of
investment prospects to the foreign portfolio managers.
REFERENCES
P a g e | 60
Aziz, A (2007). “What is mutual fund?” The management Account
ICMAP, Page 27-29.
Malkiel, Burton G, and Radisich (2001) The Growth of Index Funds and
the pricing of Equity Securities. Journal of Portfolio Management 26: 2,
9-21.
State Bank of Pakistan annual Report (2006-07). The world Bank Group
Publication (2007). Pakistan Data Profile.
Bauer, Rob, Keen Koedijk, and Roger Otter (2002) International Evidence
P a g e | 61
on Ethical Mutual Fund Performance and Investment Style. ABP
Investments Maastricht University, 1–28.
Malkiel, Burton G., and Radisich (2001) The Growth of Index Funds and
the Pricing of Equity Securities. Journal of Portfolio Management 26:2,
9–21.
Otten, Roger, and Dennis Bams (2004) How to Measure Mutual Funds
P a g e | 62
Performance: Economic Versus Statistical Relevance. Journal of
Accounting and Finance 44, 203–222.
P a g e | 63