Introduction: Mutual funds started taking theattention in between the 1880s and 1890s. When mutual funds’ investments wereboosted 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 wecan say is available for a long time, this investment instrument got started inthe Netherlands by the Dutch people in the 1880s to its current state as it isstill increasing.
With the global mutual fund industry market now consisttrillion dollars of investments in the U.S alone. 1A mutual fund is a combinationinvestment arrangement which is created by collecting money from differentinvestors and making a pool of it the main purpose behind that is toparticipate in many different securities such as bonds, money marketinstruments, stocks, and other assets. One of the advantages of mutual funds isthat it also helps the small investors in investing their money into fundswhich are professionally managed, portfolio, which is diversified and that’swhy with less risk in debt instruments and other securities. There are essentially two kinds of Mutual Funds:Ø Open-EndedMutual FundsØ Closed-EndedMutual Funds Open-endedThese are mutual funds whichfrequently generate new units or transfer issued units on demand.
They are alsocalled Unit Trusts. The Unit holders purchase the Units of the fund or maytransfer them on a constant basis at the main Net Asset Value (NAV). Theseunits can be bought and transferred through Management Company which proclaimsproposal and redemption prices daily. Close-endedThese funds have a static number ofshares like a public company and are floated over an IPO. Once delivered, theycan be bought and sold at the marketplace rates in secondary market (StockExchange). The market rate is announced daily by the stock exchange.
Afza & Rauf (2009) mutual fundsin our country Pakistan were introduced in 1962 it started when Nationalinvestment trust made a public offering which is an open ended mutual fund,later investment corporation of Pakistan in 1966 have offered closed end mutualfunds 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 abilityof investors in selecting superior funds. If investors are able to identifywhich funds will perform well in the next period, they will allocate theircapital into those funds” On the other hand Frazzini, &Lamont, (2008) Shows that when mutual fund investors invest their money in lowperforming funds and reduce their returns/earnings on average basis. This iscalled “dumb money” effect. Gruber (1996), Zheng (1999) Studiedthe Smart money effect this study shows that funds which receive a higheramount of net money flow perform better than the less popular or lower moneyflow mutual fund and this pattern was termed as smart money effect likeinvestors move towards funds that have higher past performance they bring outtheir funds from low performing funds towards high performing funds. Mutual funds usually offer a uniqueopportunity to examine the conduct of investors through the study of the mutualfund flow statistics.
It’s important, because investors’ decisions about theasset allocation across the several mutual funds may affect the asset returnslinked to these funds. For instance Goetzmann, Massa, and Rouwenhorst (2002)studies that the factors they extracted from the co variance matrix which wasused by them for mutual fund flows that the mutual funds flows separately arenot enough to show an investors sentiment, but it does show the way in which most of theinvestors participate in the mutual fund market, mostly those people withretirement plans, while there are also some economists which state that mutualfund flows may not be accurate indicator about the performance of a specificfund or funds, as the fund may have returned all its positive returns already. Although many studies have beenconducted on the mutual funds and its investors behaviors such as where theinvestor like to invest funds but these studies are mostly related to theglobal world rather than Pakistan, in our country mutual funds smart moneyeffect have not been studies before even the studies that are conducted beforethat related to the mutual funds were mostly on the evaluations of theperformance of mutual funds no one has really studied the smart money effect inthe Pakistani mutual fund industry this study will try to study Pakistan mutualfund market whether Pakistani mutual fund industry chase high performing fundsor not.