South Asian Journal of Management

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Impact of Dynamic Risk Strategy of Mutual Funds on their Performance: Evidence from Indian Equity Mutual Funds


Affiliations
1 LM Thapar School of Management, Thapar Institute of Engineering and Technology (Deemed University), Patiala, India
2 Department of Financial Studies, Delhi University, Delhi, India
3 National Institute of Financial Management, Faridabad, India
     

   Subscribe/Renew Journal


The mutual fund managers manage their risk by varying exposure on the risk factors. This dynamic risk management strategy of fund managers could affect the performance of mutual funds therefore the objective of this paper has been to study the impact of dynamic behavior of mutual fund managers on their performance. The paper has modified the four-factor conditional Carhart model to capture the dynamic risk strategy of mutual funds and measured its effect on performance of mutual funds. The shifts in risk strategy have been ascertained with Bai and Perron (1998 and 2003) test for structural breaks. Based on data of 152 diversified growth equity mutual funds in India from 33 Asset Management Companies (AMCs) for the period 2003-2013, the study found negative impact of dynamic risk strategy mutual funds on their performance but more number of mutual funds with significant positive performance. Further, incorporation of dynamic behavior of mutual funds in performance measurement model resulted in improvement in forecasting ability of performance measurement model.

Keywords

Mutual Funds, Performance, Forecasting, Risk Strategy, Structural Break.
User
Subscription Login to verify subscription
Notifications
Font Size

  • Annaert, J., & Campenhart, G. V. (2007). Time variation in mutual fund style exposures. Review of Finance, 11(4), 633-661.

  • Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica: The Journal of the Econometric Society, 66(1), 47-78.

  • Bai, J., & Perron, P. (2003). Critical values for multiple structural change tests. The Econometrics Journal, 6(1), 72-78.

  • Benegas, A., Gillen, B., Timmerman, A., & Wermers, R. (2013). The cross section of conditional mutual fund performance in European stock markets. Journal of Financial Economic, 108(3), 699-726.

  • Bessler, W., Drobertz, W., & Zimmerman, H. (2009). Conditional performance evaluation for German equity mutual funds. The European Journal of Finance, 15(3), 287-316.

  • Bollen, N. P., & Busse, J. A. (2001). On the timing ability of mutual fund managers. The Journal of Finance, 56(3), 1075-1094.

  • Bollen, N. P. B., & Busse, J. A. (2004). Short-term persistence in mutual fund performance. The Review of Financial Studies, 18(2), 569-597.

  • Bollen, N. P. B., & Whaley, R. E. (2009). Hedge fund risk dynamics: implications for performance appraisal. The Journal of Finance, 64(2), 985-1035.

  • Brown, K. C., Harlow, W. V., & Starks, L. T. (1996). Of tournaments and temptations: an analysis of managerial incentives in the mutual fund industry. The Journal of Finance, 51(1), 85-110.

  • Cesari, R., & Panetta, F. (2002). The performance of Italian equity funds. Journal of Banking & Finance, 26(1), 99-126.

  • Chen, N. F., Roll, R., & Ross, S. A. (1986). Economic forces and the stock market. The Journal of Business, 59(3) 383-403.

  • Clark, T. E., & West, K. D. (2007). Approximately normal tests for equal predictive accuracy in nested models. Journal of Econometrics, 138(1), 291-311.

  • Criton, G., & Scaillet, O. (2011). Time varying analysis in risk and hedge fund performance: How forecast ability increases estimated alpha (Working Paper). Retrieved from http://mobile.next-finance.net/IMG/pdf/HFarticle110.pdf

  • Diebold, F. X., & Mariano, R. S. (2002). Comparing predictive accuracy. Journal of Business & Economic Statistics, 20(1), 134-144.

  • Eling, M., & Faust, R. (2010). The performance of hedge funds and mutual funds in emerging markets. Journal of Banking & Finance, 34(8), 1993-2009.

  • Elton, E. J., Gruber, M. J., & Blake, C. R. (1996). Survivor bias and mutual fund performance. The Review of Financial Studies, 9(4), 1097-1120.

  • Ferson, W. E. & Schadt, R. W. (1996). Measuring fund strategy and performance in changing economic conditions. The Journal of Finance, 51(2), 425-461.

  • Ferson, W. E., & Qian, M. (2004). Conditional performance evaluation, revisited. In P. Lawton & T. Jankowski (Eds.), Investment Performance Measurement: Evaluating and Presenting Results (pp. 521-590). New Jersey, NJ: John Wiley & Sons. (Reprinted from Research Foundation of CFA Institute, 2004).

  • Ferson, W. E., & Warther, V. A. (1996). Evaluating fund performance in a dynamic market. Financial Analyst Journal, 52(6), 20-28.

  • Fibozzi, F.J., & Francis, J.C. (1979). Mutual fund systematic risk for bull and bear markets: an empirical examination. The Journal of Finance, 34(5), 1243-1250.

  • Goetmann, W., Ingersoll, J., Spiegel, M., & Welch, I. (2007). Portfolio performance manipulation and manipulation-proof performance measures. Review of Financial Studies, 20, 1503-1546.

  • Gorman, L. (2003). Conditional performance, portfolio rebalancing, and momentum of small-cap mutual funds. Review of Financial Economics, 12(3), 287-300.

  • Holmes, K. A., & Faff, R. W. (2004). Stability, asymmetry and seasonality of fund performance: an analysis of Australian multi-sector managed funds. Journal of Business Finance & Accounting, 31(3), 539-578.

  • Huang, J., Silan, C., & Zhang, H. (2011). Risk shifting and mutual fund performance. The Review of Financial Studies, 24(8), 2575-2616.

  • Jensen, M. C. (1968). The performance of mutual funds in the period 1945-1964. The Journal of Finance, 23(2), 389-416.

  • Kacperczyk, M., Sialm, C., & Zheng, L. (2005). On the industry concentration of actively managed equity mutual funds. The Journal of Finance, 60, 1983-2012.

  • Koski, J. L., & Pontiff, J. (1999). How are derivatives used? Evidence from mutual fund industry. The Journal of Finance, 54, 791-816.

  • Lance, C. E. (1998). Residual centering, exploratory and confirmatory moderator analysis, and decomposition of effects in path models containing interactions. Applied Psychological Measurement, 12(2), 163-175.

  • Lynch, A., & Wachter, J. (2007). Does mutual fund performance vary over business cycle? (Working Paper). New York, NY: New York University.

  • Otten, R., & Bams, D. (2002). European mutual fund performance. European Financial Management, 8(1), 75-101.

  • Otten, R., & Bams, D. (2004). How to measure mutual fund performance: economic versus statistical relevance. Accounting & Finance, 44(2), 203-222.

  • Pollet, J. M., & Wilson, M. (2008). How does size affect mutual fund behaviour?. The Journal of Finance, 63(6), 2941-2969.

  • Price Waterhouse Coopers (PWC) (2014). Indian mutual fund industry-challenging the status quo, setting the growth path. Mumbai, India: Author.

  • Sawicki, J., & Ong, F. (2000). Evaluating managed fund performance using conditional measures: Australian evidence. Pacific-Basin Finance Journal, 8(4), 505-528.

  • Sehgal, S., & Jhanwar, M. (2008). Short-term persistence in mutual fund performance: evidence from India. Journal of Accounting, Business & Management, 15(1), 90-108.


Abstract Views: 132

PDF Views: 0




  • Impact of Dynamic Risk Strategy of Mutual Funds on their Performance: Evidence from Indian Equity Mutual Funds

Abstract Views: 132  |  PDF Views: 0

Authors

Inderjit Kaur
LM Thapar School of Management, Thapar Institute of Engineering and Technology (Deemed University), Patiala, India
C. P. Gupta
Department of Financial Studies, Delhi University, Delhi, India
K. P. Kaushik
National Institute of Financial Management, Faridabad, India

Abstract


The mutual fund managers manage their risk by varying exposure on the risk factors. This dynamic risk management strategy of fund managers could affect the performance of mutual funds therefore the objective of this paper has been to study the impact of dynamic behavior of mutual fund managers on their performance. The paper has modified the four-factor conditional Carhart model to capture the dynamic risk strategy of mutual funds and measured its effect on performance of mutual funds. The shifts in risk strategy have been ascertained with Bai and Perron (1998 and 2003) test for structural breaks. Based on data of 152 diversified growth equity mutual funds in India from 33 Asset Management Companies (AMCs) for the period 2003-2013, the study found negative impact of dynamic risk strategy mutual funds on their performance but more number of mutual funds with significant positive performance. Further, incorporation of dynamic behavior of mutual funds in performance measurement model resulted in improvement in forecasting ability of performance measurement model.

Keywords


Mutual Funds, Performance, Forecasting, Risk Strategy, Structural Break.

References