Mutual Fund Market Research Articles

An Empirical Study on the Performance of Select Multicap Equity Mutual Funds in India

Mutual funds are emerging as a popular choice among investors to park their surplus funds in India as exemplified by increasing assets under management (AUM). The study discusses several industry trends such as increase in mutual fund accounts and schemes, changing consumer preferences towards equity mutual funds and the increasing role of retail investors in the overall mutual fund market. While barriers continue to act as deterrents, the overall industry is poised to reach INR20,00,000 crore in terms of AUM by FY18. The study aims to evaluate the annual as well as periodical performance of 5 multicap mutual fund schemes of top 5 asset management companies for the period of five years from 1st April 2012 to 31st March 2017. Taking SandP BSE 500 as the benchmark index, the study computes several absolute and relative performance measures using Sharp and Treynor Ratios along with Jensen Alpha. The study finds that all schemes except HDFC Premier Multicap fund generated higher risk adjusted returns than the benchmark index. Birla Sunlife Equity fund emerged as the best performer with higher average returns and lower risk.

Why are investors’ mutual fund market allocations far from optimal?

Why are investors’ mutual fund market allocations far from optimal?

Using Agent-Based Modeling to Assess Liquidity Mismatch in Open-End Bond Funds

In this paper, we introduce a small-scale heterogeneous agent-based model of the US corporate bond market. The model includes a realistic micro-grounded ecology of investors that trade a set of bonds through dealers. Using the model, we simulate market dynamics that emerge from agent behaviors in response to basic exogenous factors (such as interest rate shocks) and the introduction of regulatory policies and constraints. A first experiment focuses on the liquidity transformation provided by mutual funds and investigates the conditions under which redemption-driven bond sales may trigger market instability. We simulate the effects of increasing mutual fund market shares in the presence of market-wide repricing of risk (in the form of a 100 basis point increase in the expected returns). The simulations highlight robust-yet-fragile aspects of the growing liquidity transformation provided by mutual funds, with an inflection point beyond which redemption-driven negative feedback loops trigger market instability.

It's all in the name: Mutual fund name changes after SEC Rule 35d-1

Abstract We study how investors respond to ‘superficial’ mutual-fund name changes that occur for no fundamental reasons. We find that such name changes remain widespread even after regulation to curb potentially misleading name changes (SEC Rule 35d-1). Superficial changes are more widespread than previously studied ‘misleading’ changes that are not accompanied by corresponding portfolio adjustments reflecting the investment style suggested by the new name. Superficial changes appear to be driven by managerial incentives. Investors react to superficial changes with increased fund flows but appear to gain no benefit through improved performance or lower fees. On the contrary, name-change funds underperform as a group. Our findings highlight inefficiencies in the mutual-fund market and hold important implications for the stakeholders involved.

Does Competition Protect Retail Investors? Role of Financial Advice

The active money management industry has been characterized by both strong competitive pressure from passive investment vehicles and high fees. This paper investigates how the introduction of low-cost index funds affects fund company strategies. The retail mutual fund market is segmented, where unsophisticated investors rely on financial advisers, and sophisticated ones invest directly. Exploiting the staggered entry of low-cost Vanguard index funds as competitive shocks, I show that in response to competition, incumbents sold to self-directed investors reduce their fees by five percent of the mean; however, funds sold with broker recommendations increase their fees by six percent of the mean. The index fund entry also slows the growths of actively managed funds. The responsiveness of broker-sold fund flows to distribution fees increases, suggesting a shift in composition towards less elastic consumers. Further, incumbents increase the degrees of active management. The results illustrate why mutual fund fees decline slowly in the aggregate despite the competition from lower-cost alternatives.

Index Fund Entry and Financial Product Market Competition

The active money management industry is characterized by both strong competitive pressure from passive investment vehicles and high fees. This paper investigates how the introduction of low-cost index funds affects fund company strategies. The retail mutual fund market is segmented, where unsophisticated investors rely on financial advisers and sophisticated ones invest directly. Exploiting the staggered entry of low-cost Vanguard index funds as competitive shocks, I show that, in response to competition, incumbents sold to self-directed investors reduce their fees by 5% of the mean; however, funds sold with broker recommendations increase their fees by 6% of the mean. Index fund entry also slows the growth of actively managed funds. The responsiveness of broker-sold fund flows to distribution fees increases, suggesting a shift in composition toward less elastic consumers. Further, incumbents increase the degree of active management. The results illustrate why mutual fund fees slowly decline in the aggregate despite competition from lower-cost alternatives. This paper was accepted by Gustavo Manso, finance.

Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

Examining a shock to the salience of the sustainability of the US mutual fund market, we present causal evidence that investors marketwide value sustainability. Being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high sustainability funds outperform low sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and non-pecuniary motives influencing investment decisions.

Research Paper on Impact of Macroeconomic Variables on Mutual Funds in India

Any investment decision necessitates the prior evaluation of risk and reward attributes associated with investing in a particular security or portfolio of securities. With the plethora of schemes to choose from and increasing awareness amongst the general public, mutual funds have been emerging as a desired investment option in comparison to other investment avenues. However, before making an investment decision, the investor has to examine the various macroeconomic factors. There are numerous variables at the economy, industry and the company level which have an influence on the investment choices of the investors. In this context, the present study attempts to ascertain the macroeconomic factors which have an impact on the mutual funds market. The association between the Mutual funds market and the macroeconomic variables has been analysed using Regression model. Further, the Existence of causal relationship has been analysed using the Granger Causality test. It is apparent from the study that the Real macroeconomic variables considered for the analysis do not have a significant influence on the Mutual funds market and were not found to be reliable to even predict the market movements.

Should Indirect Brokerage Fees Be Capped? Lessons from Mutual Fund Marketing and Distribution Expenses

Theory predicts that capping brokers’ compensation exacerbates the exploitation of retail investors. We show that regulated caps on mutual fund 12b-1 fees, effectively sales commissions, are associated with negative equity fund performance, but only after a structural shift toward maximum permitted levels of the fees around 2000. Past this break point, flow–performance sensitivity shifts from the middle- to the highest-performing funds, suggesting that the fee cap increases performance-chasing behavior by constraining brokers’ incentives to learn about lower-ranked funds. The policy implication is that regulators must reevaluate the efficacy of caps on brokerage fees.

Comparative Performance Analysis of Public Sector Sponsored and Private Sector Sponsored Mutual Funds in India

The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existence of only one mutual fund Company in India, namely the Unit Trust of India (UTI), with Rs. 67 billion assets under management (AUM). Few other mutual fund companies entered the mutual fund market later on. The private sector funds started penetrating the fund families during 1993. Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. By the end of 1993, the total AUM of the industry was Rs. 470. 04 billion. Just after ten years with private sector penetration, the total assets rose up to Rs. 1218. 05 billion and till 2004, it reached the height of 1540 billion. The total AUM of the mutual fund industry has risen up to 14000 billion in April, 2016. Today there are 43 mutual funds in India offering a number of schemes suited to the needs of different type of customers. It has been noticed that the private sector mutual funds have been taking more risks and have also been able to gain higher returns on an average. This paper tries to highlight the comparative performance of public and private sector mutual funds and also throw light on the scope of the existing potential of the fund market in the face of traditional risk aversion of the investors and huge rise in financial assets.

Efficiency of mutual funds and performance measurement in India: an empirical investigation

The present study investigates the performance of mutual fund schemes, selectivity and market timing skill of fund managers by using Sharpe model, Treynor's model, Jensen alpha, information ratio, M-square model, Sortino ratio, Treynor-Mazuy and Henriksson-Merton models. The study uses daily observation of NAV and NIFTY index over the period of August 2008 to August 2014. The results of the study suggests that most of the mutual fund schemes indicate good performance and professional management selectivity skills in fund analysis as per Treynor ratio, Sharpe ratio, M square model, Sortino ratio and Jensen's alpha. The study also finds the evidence of reversal performance and persistence of mutual funds as per information ratio indicating presence of market efficiency in the long run. The study reveals that 43% mutual fund managers are able to time the market correctly during the period of study under both the models. The study concludes that an investor is required to take wise investment decisions by analysing the return and risk parameters of the mutual funds' to achieve their investment objectives.

Performance Evaluation of Bangladeshi Mutual Fund: An Analysis of Monthly Return Based on Net Asset Value

The popularity of mutual fund investing among private investors has grown dramatically all over the world during last 40 years. Therefore, the research in mutual fund has increased significantly. Despite this huge demand of mutual fund investing, only a few researches on mutual fund have been conducted in Bangladesh. In this paper an attempt is made to evaluate the performance of 15 close-ends Bangladeshi mutual funds traded in DSE (Dhaka stock exchange) based on monthly net asset value. For this purpose the methodologies employed in this study are risk adjusted performance measures suggested by Jensen, Treynor, and Sharpe widely known as Jensen alpha, Treynor ratio, Sharpe ratio. DSEX index has used as a proxy for benchmark index. The study found that over the research period (from 2013 to 2017) 12 out of 15 funds got superior return compared to benchmark index return. In addition to, diversification, market timing and selectivity skill of fund managers are tested with help of co-efficient of determination (R2), quadratic regression of Treynor and Mazuy and Fama decomposition model respectively. The paper found that 9 out of 15 funds are well diversified and have reduced its unique risk. Finally this paper has revealed no statistically significant timing skill but moderate level of selectivity in mutual fund market of Bangladesh.

The Mutual Fund Investor

This chapter for an upcoming handbook on mutual funds (by Edward Elgar Publishing) offers an overview of the mutual fund market and the investors who inhabit it. On the supply side, mutual funds hold $16 trillion in financial assets and have become the largest component of our private retirement system. On the demand side, mutual fund ownership has become widespread, with 90 million fund-owning households composed mostly of middle-class, educated, and older investors.The portrait of mutual fund investors, painted by a large and consistent body of academic and government studies over the past few decades, is disturbing. Fund investors are mostly ignorant of fund characteristics, inattentive to risks (and opportunities) of different asset classes, and often insensitive to fund fees. Instead, fund investors tend to chase past returns and attempt to time the market. As a result, the average returns for fund investors (both in stock and bond funds) have significantly trailed benchmark market returns – according to some studies, by several percentage points.The role of financial intermediaries in the mutual fund market is also disconcerting. Often, financial advisers give fund investors conflicted advice, leading them to choose high-cost, under-performing funds on which the advisers garner commissions. Although some employers are shifting employees to low-cost, risk-appropriate balanced funds, many 401(k) plans remain less than optimal. Moreover, fund companies tout higher-cost actively managed funds, despite growing evidence that most, if not all, fund managers are unable to beat the market – particularly after fees.There are, however, glimmers of hope. Recently, many fund investors have moved to lower-cost index funds – reflecting a new sensitivity both to the importance of low costs and to the empty promise of active fund management. Target date funds have also established a beachhead in the 401(k) market. The recent clarion calls of the financial press reinforces these trends, as a growing drumbeat of stories emphasizes the importance of fund fees, the counter-productivity of trying to beat or time the market, and the emptiness of chasing past fund performance.

Market Power in the Portfolio: Product Market Competition and Mutual Fund Performance

I provide evidence that fund managers who overweight firms with the most differentiated products (‘monopolies’) exhibit a superior risk-adjusted performance. This is consistent with information advantages due to a better understanding of qualitative information on a firm’s competitive environment. I find that funds with above median monopoly bets outperform by up to 92 basis points annually and trade more successfully in both their monopoly and non-monopoly sub-portfolios. My identification strategy includes exogenous shocks to information quality using the Sarbanes-Oxley Act and to a firm’s product market environment using the 9/11 terrorist attacks. I document that managers who place larger monopoly bets are less likely to invest into rival firms at the same time, have a longer investment horizon, and hold more illiquid and high quality stocks.

Money is Smart: New Evidence from Investorss Buys and Sells

The existence of a “smart money” effect has been debated since Gruber (1996) and Zheng (1999) suggested investors select mutual funds that subsequently perform well. Using hand-collected data on monthly inflows and outflows, we examine the relation between fund flows and subsequent fund performance in the U.S. mutual fund market. Our results indicate that investors make smart choices when selecting mutual funds. In particular, their money flow into small funds and money flow out of large funds strongly predict future performance. The effects are robust after controlling for a momentum effect. We also show that investors’ fund selection ability exists even in top-performing funds, which means that the smart money effect is separate from investors’ return-chasing behavior.

When is Money Smart? Mutual Fund Flows, Energy Prices, and Household Disposable Income

This study shows that the representative investor’s sophistication in the market for mutual funds is time-varying, and increases with the constraints on household disposable income at the aggregate level. Based on the fact that energy commodities are largely inelastic household expenditures that reduce disposable income, I use changes in retail energy prices to proxy for short-run exogenous changes in the disposable income of potential investors. New money flows to actively managed U.S. equity mutual funds decrease with the constraints on disposable income, ceteris paribus. The representative investor shows fund selection and timing ability only in periods when the constraints on disposable income sharply increase, but does not display discernable ability unconditionally. Fund flows are more rationally sensitive to price (i.e. fees and loads) and funds’ past risk-adjusted performance when the constraints on disposable income increase. The results are also consistent with the representative fund investor displaying more aversion towards funds associated with more agency problems and inferior manager skill in periods when the constraints on disposable income increase.

The role of fund size in the performance of mutual funds assessed with DEA models

This contribution studies the role of the size of mutual funds in the evaluation of the fund performance with a data envelopment analysis (DEA) approach, with the aim of studying the issue from different angles and with different statistical tools and investigating the presence of a positive or negative size effect in mutual funds market. Firstly, we discuss the role of fund size in the performance evaluation and wonder whether it is appropriate to include size information among the variables of DEA models. Secondly, we analyse the presence of a relationship between the performance scores and the size of mutual funds using different statistical tests and carry out an empirical investigation on a set of European equity mutual funds. Thirdly, we study scale efficiency and investigate whether the European mutual funds analysed exhibit constant, increasing or decreasing returns to scale.

A Statistical Analysis and Empirical Study of Investors Behaviour in Mutual Fund Market

A Statistical Analysis and Empirical Study of Investors Behaviour in Mutual Fund Market

Managerial Ability, Risk Preferences and the Incentives for Active Management

This paper uses a structural econometric model to assess the managerial ability of Spanish management companies. Traditionally, ability has been mainly measured by the alphas of CAPM models. The model used in this paper allows to disentangle the ability and preferences that are embedded in alphas. The results show that the abilities of Spanish management companies are lower than their peers in the US. This result could be the consequence of the limited competition in the mutual fund market as well as the narrowness of the equity markets that the funds invest in. Moreover, it is shown that the fraction of the funds' portfolios that is actively managed does not depend on the fees paid and it is negatively correlated to funds' total assets and whether a fund belongs to a credit institution's management company.

Are Style Rotating Funds Successful at Style Timing? Evidence from the US Equity Mutual Fund Market

Are managers who style-rotate successful at timing style shifts? Or, does this type of activity erode fund value? It is well documented that fund styles exposures vary over time, whether it be a result of passive style drift or strategic changes by managers to capitalise on broad style movements. It is therefore reasonable to expect that funds with high style rotation ought to be capable of timing broad style movements. This paper investigates whether funds that frequently change investment styles are capable of timing style movement, and how this behaviour influences performance. Time-varying fund style exposures are estimated for a sample of US domestic equity mutual funds from a dynamic state-space factor model as well as from a holdings-based approach. Style-timing ability is measured from four-factor Treynor-Mazuy and Henriksson-Merton models. The results show that funds that more aggressively rotate portfolios across market, size, value and momentum exposures are less capable of timing movements in these respective style categories and as such perform worse than those that maintain consistent style exposures.