Introduction:
                 

Mutual funds started taking the
attention in between the 1880s and 1890s. When mutual funds’ investments were
boosted and investors started using mutual funds giving them higher returns,
however, this idea of combining the funds have been used for a long time or we
can say is available for a long time, this investment instrument got started in
the Netherlands by the Dutch people in the 1880s to its current state as it is
still increasing. With the global mutual fund industry market now consist
trillion dollars of investments in the U.S alone. 1

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A mutual fund is a combination
investment arrangement which is created by collecting money from different
investors and making a pool of it the main purpose behind that is to
participate in many different securities such as bonds, money market
instruments, stocks, and other assets. One of the advantages of mutual funds is
that it also helps the small investors in investing their money into funds
which are professionally managed, portfolio, which is diversified and that’s
why with less risk in debt instruments and other securities.

 

There are essentially two kinds of Mutual Funds:

Ø  Open-Ended
Mutual Funds

Ø  Closed-Ended
Mutual Funds

 

Open-ended

These are mutual funds which
frequently generate new units or transfer issued units on demand. They are also
called Unit Trusts. The Unit holders purchase the Units of the fund or may
transfer them on a constant basis at the main Net Asset Value (NAV). These
units can be bought and transferred through Management Company which proclaims
proposal and redemption prices daily.

 

 

Close-ended

These funds have a static number of
shares like a public company and are floated over an IPO. Once delivered, they
can be bought and sold at the marketplace rates in secondary market (Stock
Exchange). The market rate is announced daily by the stock exchange.

 

Afza & Rauf (2009) mutual funds
in our country Pakistan were introduced in 1962 it started when National
investment trust made a public offering which is an open ended mutual fund,
later investment corporation of Pakistan in 1966 have offered closed end mutual
funds which was then divided into two types in the year 2000 privatized too.

 

Ungphakorn, (2014) explains the smart money effect “Smart money effect is the selectivity ability
of investors in selecting superior funds. If investors are able to identify
which funds will perform well in the next period, they will allocate their
capital into those funds”

On the other hand Frazzini, &
Lamont, (2008) Shows that when mutual fund investors invest their money in low
performing funds and reduce their returns/earnings on average basis. This is
called “dumb money” effect.

 

Gruber (1996), Zheng (1999) Studied
the Smart money effect this study shows that funds which receive a higher
amount of net money flow perform better than the less popular or lower money
flow mutual fund and this pattern was termed as smart money effect like
investors move towards funds that have higher past performance they bring out
their funds from low performing funds towards high performing funds.

 

Mutual funds usually offer a unique
opportunity to examine the conduct of investors through the study of the mutual
fund flow statistics. It’s important, because investors’ decisions about the
asset allocation across the several mutual funds may affect the asset returns
linked to these funds. For instance Goetzmann, Massa, and Rouwenhorst (2002)
studies that the factors they extracted from the co variance matrix which was
used by them for mutual fund flows that the mutual funds flows separately are
not enough to show an investors sentiment, but it does show

the way in which most of the
investors participate in the mutual fund market, mostly those people with
retirement plans, while there are also some economists which state that mutual
fund flows may not be accurate indicator about the performance of a specific
fund or funds, as the fund may have returned all its positive returns already.

 

Although many studies have been
conducted on the mutual funds and its investors behaviors such as where the
investor like to invest funds but these studies are mostly related to the
global world rather than Pakistan, in our country mutual funds smart money
effect have not been studies before even the studies that are conducted before
that related to the mutual funds were mostly on the evaluations of the
performance of mutual funds no one has really studied the smart money effect in
the Pakistani mutual fund industry this study will try to study Pakistan mutual
fund market whether Pakistani mutual fund industry chase high performing funds
or not.

1
https://www.investopedia.com/articles/mutualfund/05/mfhistory.asp