Analysis of Indian mutual funds to detect ‘Closet Indexing’

Abstract

‘Closet indexing’ refers to the practise adopted by mutual fund scheme managers to closely follow the scheme’s benchmark index (though they claim the fund to be actively managed), in order to reduce the odds of underperformance. The purpose of this project is to detect the degree of closet indexing in Indian mutual funds by finding out different techniques from research papers and applying them on Indian Funds’ data. Out of the 7 techniques found 4 techniques: Tracking error (TE), Regression, fund fees/expense ratio and Active share are chosen in Indian context (due to data availability constraints). TE technique is performed on 198 fund schemes and 24 benchmark indices to arrive at initial prospect list of closet index funds. Other 3 techniques are performed to validate the results. Finally, the report is concluded with the list of most probable closet index funds and strength of the applied techniques.