South Asian Journal of Management

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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
     

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

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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