Financial Risk Management

Stock Selection and Market Timing Performance of Mutual Fund Schemes by Market Cap in India: An Empirical Investigation

Article Details

Pub. Date	: Sep, 2023
Product Name	: The IUP Journal of Financial Risk Management
Product Type	: Article
Product Code	: IJFRM010923
Author Name	: Pooja Bangada
Availability	: YES
Subject/Domain	: Finance Management
Download Format	: PDF Format
No. of Pages	: 27

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Abstract

The study examines the market performance in terms of stock selection and market timing skills of fund managers before, during and after the Covid-19 pandemic, with reference to selected small, mid and large cap mutual fund schemes. The study further investigates the presence of small firm effect in the Indian context by testing if small capitalization schemes of a fund house exhibit better performance than its large cap schemes. Performance evaluation has been conducted using Jensen’s differential model, Treynor-Mazuy model and Henriksson-Merton model. A majority of the fund managers were successful in stock selection by identifying the underpriced securities during the pre- Covid and post-Covid periods. However, a majority of the schemes exhibited perverse market timing skills during the post-Covid period, while there was no significant evidence of market timing skills during the pre-Covid and Covid periods. The study provides valuable insights on fund performance, which can help investors to make informed decisions, fund managers to revisit their performance, and regulators to ensure a better policy framework.

Introduction

A mutual fund is an investment vehicle wherein funds are pooled by the investors into equity, gold, bonds and other various assets available in the market. Mutual funds are associated with risk and their performance depends upon the fund manager. Fama (1970), in his Efficient Market Hypothesis, stated that all information is reflected in the markets and no fund manager can outperform the markets, and it is merely due to luck. The capacity of fund managers to demonstrate consistent performance, as well as their stock selection and market timing skills, must thus be verified. Considering each of these aspects, numerous researchers (viz., Grinblatt and Titman, 1989; Goetzmann and Ibbotson, 1994; Elton et al., 1996; Carhart, 1997; Wermers, 2000; and Kothari and Warner, 2001) have made significant efforts to conduct performance evaluation of investment managers.