The Impact of Deposit Rates and Net Asset Value on Mutual Fund Performance: Evidence from Pakistan's Banking Sector

Abstract

The intention of this research is to study how deposit rates and net asset value (NAV) influence the performance of mutual funds of Pakistan banking sector. The research employs ARDL econometric technique to explore short and long term relationships between variables of the study and mutual fund performance. Their findings reveal a strong positive dynamic relation between mutual funds and NAV and consequently, high NAV enhances mutual fund's performance in the long run. Contrarily, mutual funds have a significant negative long-term relationship with deposit rates, implying that higher deposit rates may reduce mutual funds investment due to the preference of the investors to safer, interest bearing deposits. The results of the Error Correction Model (ECM) suggest in the short term deposit rates and NAV have significant negative impact on mutual fund performance thus short term variations in these variables might not be good for mutual funds. Our findings demonstrate the dealings between market dynamics and interest rate policies on mutual fund performance in the Pakistan’s banking sector. The study has important lessons for investors and policymakers that, on the one hand, investors are to take into account economic indicators on the macroeconomic level and on the other hand, fund managers and policymakers in general should select their instruments considering both macroeconomic indicators and market tendencies.