Performance of mutual funds

Abstract

A mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities. The fund manager, also known as portfolio manager, invests and trades the fund's underlying securities, realizing capital gains or losses and passing any proceeds to the individual investors. Currently, the worldwide value of all mutual funds totals more than $26 trillion. Since individual investors lack the resources to efficiently analyze company s performance and subsequently make intelligent investment decisions, they often rely on the fund manager expertise and make investments in mutual funds. As such, it becomes important to accurately assess mutual funds performance on a relative basis, based on both the returns as well as risk involved. Several Rating agencies have developed rating methods which categorize these mutual funds on a scale of1 to 5, ICRA being one of the. While these ratings are essentially a scorecard of the fund performance till date, empirical data suggests that they have been consistently used by fund managers in advertizing their fund performance in order to attract further investors cash flows. This study attempts to demonstrate the role played by ICRA ratings in influencing investors decisions. Having established the same, the focus moves on assessing the predictive power of these ratings in terms of future fund performance, through an out-of-sample analysis. Finally, the basic performance measures used to gauge the out-of-sample fund performance are examined for their susceptibility to managerial manipulations due to principal-agent problem, the rewards of fund managers being closely tied with fund performance as assessed through these measures. Finally, the limitations both in terms of scope and accuracy of the analysis carried out has been discussed, with suggestions for future refinement.