Evaluating alternative performance benchmarks for Indian mutual fund industry

Abstract

Purpose The purpose of this paper is to perform a relative assessment of performance benchmarks based on alternative asset pricing models to evaluate performance of mutual funds and suggest the best approach in Indian context. Design/methodology/approach Sample of 237 open-ended Indian equity (growth) schemes from April 2003 to March 2013 is used. Both unconditional and conditional versions of eight performance models are employed, namely, Jensen (1968) measure, three-moment asset pricing model, four-moment asset pricing model, Fama and French (1993) three-factor model, Carhart (1997) four-factor model, Elton et al. (1999) five-index model, Fama and French (2015) five-factor model and firm quality five-factor model. Findings Conditional version of Carhart (1997) model is found to be the most appropriate performance benchmark in the Indian context. Success of conditional models over unconditional models highlights that fund managers dynamically manage their portfolios. Practical implications A significant α generated over and above the return estimated using Carhart’s (1997) model reflects true stock-picking skills of fund managers and it is, therefore, worth paying an active management fee. Stock exchanges and credit rating agencies in India should construct indices incorporating size, value and momentum factors to be used for purpose of benchmarking. Originality/value The study adds new evidence as to applicability of established asset pricing models as performance benchmarks in emerging market India. It examines role of higher order moments in explaining mutual fund returns which is an under researched area.

Mutual Fund Characteristics and Investment Performance in India

“…A comprehensive study of performance benchmarks, conducted by Otten and Bams (2004) for US mutual funds, finds Carhart (1997) four factor model to be statistically the strongest model in conditional setting. In Indian context, Sehgal and Babbar (2017) also suggest conditional version of Carhart (1997) four factor asset pricing model as the optimal performance benchmark to evaluate mutual fund performance. The previous research uses Carhart (1997) model in conditional as well as unconditional settings as it includes size, book-to-market equity and momentum factors, and it lends more explanatory power to estimate alphas of funds (Bollen & Busse, 2001; Kaushik & Pennathur, 2012; Lai & Lau, 2010; Sehgal & Jhanwar, 2008).…”

Market Timing Abilities of Large-Cap Equity Mutual Fund Managers: Evidence From India

“…However, Chopra (2011) documents mixed results for MTA. Sehgal and Babbar (2017) proposes the alternative performance benchmarks for evaluating the funds. The application of the constrained quadratic factor model by Mohanti and Priyan (2018) reveals a significant level of active management and superi-or SPS.…”

“…The study employs these two methods with public information variables, an improvement with the traditional measures (Becker, Ferson, Myers & Schill, 1999;N. P. B. Bollen & Busse, 2001;Bollen & Pool, 2008;Deb, 2019;Dhar & Mandal, 2014;Elton, Gruber & Blake, 2012;Ferson & Warther, 1996;Sehgal & Babbar, 2017;Sehgal & Jhanwar, 2008). The conditional version applied with public information variables assumes semi-strong market efficiency.…”

The impact of country-level and fund-level factors on mutual fund performance in Vietnam

“…3.2 Hypothesis development 3.2.1 Mutual funds' performance. Mutual funds' performance measures the growth of the funds in terms of their total return, net asset value, dividends and capital gains distributions over a given period (Sehgal and Babbar, 2017). Mutual funds' performance must match the investment objective mentioned in the funds' prospectus.…”