Mutual funds are one of the most studied areas in developed countries due to their efficient role in reducing the risk and increasing the return through professional management of the funds. These funds increase the incomes of small investors as well as reduce the unsystematic risks in the financial decisions. Pakistan was the pioneer in the field of Mutual Funds in the South Asia Region, when it launched National Investment Trust (NIT), an open-ended mutual fund in 1962, followed by the establishment in 1966 of Investment Corporation of Pakistan (ICP), which launched a series of close-ended mutual funds. Both NIT and ICP were established in the public sector. However, it subsequently failed to maintain the tempo of the initiative taken in the field until early nineties mainly due to multiple reasons1 including frequent changes in economic policies, high rates of alternative investment such as National Saving Schemes (NSS), capital outflow, limited investment options, profusion of risk free investment options in Government securities, lack of awareness among the general public about collective investment schemes, lack of aggressive marketing and distribution network. With the year 2002, a boom in the economy, privatization initiatives and consistent growth of GDP resulted in higher per capita income. The private sector played a major role in attracting investments in mutual funds along with professional management and attractive marketing techniques mutual fund industry grew by an average of 57% since 2003. This paper has focused on the growth of Income funds during 2003-2007 to analyze if this growth is leading to an investment bubble or the industry is really developing in Pakistan.This highlights the need of Index funds in the money market of Pakistan because the difference is already very low and by eliminating management fees of 1.5% through Index Funds, we will be able to out perform market by 100 basis points. Experience and knowledge of banks especially Tier 1 banks was not helpful in beating the market but it helped them to reduce their loss than other funds who did not have such experience and knowledge.