Who Drives Whom? Mutual Funds VS Stock Market

Abstract

In this study we want to investigate the implication of stock market performance on mutual funds and vice versa. Purpose of the study was also to observe whether variation in NAV of mutual funds “Causes†variation in indices and vice versa. In order to observe this Cause and variation relationship study used the daily data on NAV of five open end mutual funds and KSE 100 indices for the period 2006 to 2010. The results obtained at the end shows there is unidirectional causality, bidirectional causality and causality independent to direction. “Everything causes Everything†is the thought of one school, while other school of thought is contrary to this belief. A couple of years ago Karachi stock market was tumbling and few corrections caused variation in mutual funds NAV. Hence other motive of the study was to observe whether historical performance of stock market and mutual funds contains useful information to predict the current NAV and current stock market performance. The results of study revealed the fact though stock market and mutual funds both affect the performance of each other but there may be some other factors which are also responsible for the performance of stock market and mutual funds.