Testing the skill of mutual fund managers: evidence from India

Prateek Sharma (Department of Finance and Accounting, Indian Institute of Management, Lucknow, India)
Samit Paul (Department of Finance and Accounting, Indian Institute of Management, Lucknow, India)

Managerial Finance

ISSN: 0307-4358

Publication date: 10 August 2015

Abstract

Purpose

The purpose of this paper is to utilize a constrained random portfolio-based framework for measuring the skill of a cross-section of Indian mutual fund managers. Specifically, the authors test whether the observed performance implies superior investment skill on the part of mutual fund managers. Additionally, the authors investigate the suitability of mutual fund investments under diverse investor expectations.

Design/methodology/approach

The authors use a new skill measurement methodology based on a cross-section of constrained random portfolios (Burns, 2007).

Findings

The authors find no evidence of superior investment skill in the sample of Indian equity mutual funds. Using a series of statistical tests, the authors conclude that the mutual funds fail to outperform the random portfolios. Furthermore, mutual funds show no persistence in their performance over time. These results are robust to choice of performance measure and the investment horizon. However, mutual funds provide lower downside risks and may be suitable for investors with high degree of risk aversion.

Originality/value

The authors extend Burns’ (2007) methodology in several aspects, especially by using a much wider range of performance and downside risk measures to address diverse investor expectations. To the best of the authors’ knowledge, this is first study to apply the constrained random portfolios-based skill tests in an emerging market.

Keywords

Citation

Sharma, P. and Paul, S. (2015), "Testing the skill of mutual fund managers: evidence from India", Managerial Finance, Vol. 41 No. 8, pp. 806-824. https://doi.org/10.1108/MF-04-2014-0112

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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