Performance evaluation of Islamic mutual funds against conventional mutual funds: evidence from Pakistani equity funds

Abstract

Islamic Mutual funds are restricted in their investment ability that makes them different from conventional mutual funds. Even though, there is a surge in the popularity of Islamic funds off late, the academic literature on these funds is limited. Consequently, this research paper aims to bridge this gap by examining the performance of ten Islamic funds invested in Pakistan against conventional funds. Monthly data of these funds is used to examine the performance of these funds that cover five years from 2006-2009. The study was conducted to identify and evaluate the determinants of performance regarding mutual funds. The mutual funds were studied in two groups’ that is Islamic mutual funds and conventional mutual funds. For conducting the subject study an analysis of the panel data of ten Islamic mutual funds and ten conventional mutual funds from funds of Pakistan for the period of four years was used. The data was based upon four years that is 2006 to 2009. The purpose to conduct a study was to identify the factors influencing performance of the mutual funds. Along with the performance measure, the study based upon comparison of the performance of Islamic and conventional mutual funds. The regression analysis was used on the panel data of four years that is 2006 to 2009, to examine relation of factors effecting performance of the fund and there after their comparison. To measure the subject relationship data was collected from different sources. Those sources includes database like Eurekahedge; Mutual fund association of Pakistan, Karachi Stock Exchange and Business Recorder. 3 To verify the relation between different variables of performance of the mutual fund and comparison of the two types of funds with respect to their performance, correlation as well as regression was run by using Eview software. The results disclosed that two variables that are size and age of both type of mutual funds have significant positive relation with performance of the fund, whereas risk associated with the fund has significant negative relationship with performance of the funds. Furthermore performances of the Islamic mutual funds and conventional mutual funds have showed significant positive relationship. Future aspects as well as its practical implications were also elaborated.