Horizon heterogeneity, institutional constraint and managerial myopia: a multi-frequency perspective on ELSS

Abstract

In the context of equity linked saving schemes (ELSS), the study elucidates how horizon heterogeneity, arising because of institutional constraint, can instigate managerial myopia which inevitably culminates into adverse asset-selection decision. Horizon heterogeneity is found to be induced by the 'lock-in-period provision' of ELSS which results in a mismatch between 'long term capital appreciation' objective of the investors and 'short term value augmentation' motivation of the managers. To empirically ascertain the amplitude of this scale-mismatch the paper employs the noble methodology of wavelet transformation wherein fluctuations of the price movement across multiple scale are segregated without any generic loss of information. The time-frequency analysis reveals that relative risk of ELSS changes with the change in frequency intervals. The shorter horizon (daily frequency) downside-risk-based ranking of ELSS is found to be exorbitantly different from the ranking devised over longer horizons (two to four years). The findings explicates that risk-based ranking exercise may mislead investors if horizon correction is not done while developing such rankings. The study further urges that the Security and Exchange Board of India (SEBI) should contemplate reviewing the Mutual Fund Regulation Act 1996 in the light of this discovery so as to abide by the policy of true and fair risk disclosure.