Academic journal article IUP Journal of Applied Finance

Market Timing Ability of Selected Mutual Funds in India: A Comparative Study

Academic journal article IUP Journal of Applied Finance

Market Timing Ability of Selected Mutual Funds in India: A Comparative Study

Article excerpt

(ProQuest: ... denotes formulae omitted.)


The mutual fund industry is a fast growing sector of the Indian financial markets. They have become major vehicle for mobilization of savings, especially from the small and household savers for investment in the capital market. Mutual funds entered the Indian capital market in 1964 with a view to provide the retail investors the benefit of diversification of risk, assured returns, professional management. Since then they have grown phenomenally in terms of number, size of operations, investor base and scope. With the ushering in of economic reforms in the early 1990s, the Government of India opened the way for the entry of private sector and foreign players into this industry. Consequently, this has emerged as a highly competitive financial service industry today. In India, the mutual fund industry came into being with the establishment of Unit Trust of India in 1964. Public sector banks and financial institutions began to establish mutual funds in 1987. The private sector and foreign institutions were allowed to set up mutual funds in 1993. Mutual funds have all come forward with varying schemes suitable to the needs of saving populace. By March 2005, there were 29 mutual funds and over 450 schemes in India, with assets under management of Rs. 1,49, 600 cr.

In this study, we analyze the empirical results pertaining to the overall performance of selected mutual fund schemes in terms of various performance measures. The focus in evaluating the overall performance has been on fund manager's skills in security selection, which involve micro forecasting-forecasting of price movements of individual stocks and identifying under or overvalued stocks. But in constructing a portfolio, timing of investment is as important as selection of securities. Selection of good securities at the wrong time may not help the fund managers to achieve the investment/diversification objectives. Starting to ride the bullish trend by buying securities at its peak or offloading the securities in bearish trend at its turning point will adversely affect the rate of return. Therefore, market timing is a vital activity in the investment decision making process. It is possible for fund managers to generate superior performance by timing the market correctly, in addition to stock selection techniques. Thus, it could be possible that differential returns are generated not only by careful 'micro' security selection efforts but also by engaging in successful 'macro' market timing activities in the volatile stock markets. Successful fund managers are those who are capable of assessing correctly the direction of the market, whether bull or bear, by positioning their portfolios accordingly. If managers are expecting a declining market, they could change their portfolio suitably by increasing the cash percentage of the portfolio or by adjust their equity investments in favor of defensive securities having lower beta. In case of a rising market, fund managers could reduce the cash position or adjust their equity portfolio in favor of aggressive securities having higher beta. By adjusting their portfolios correctly to the market timing, fund managers can generate superior returns compared to the market.

Review of Literature

In their pioneering work, Treynor and Mazuy (1966)-hereafter TM-developed a model for testing the market timing abilities of the fund managers and found significant timing ability in only 1 out of 57 funds in their sample. Henriksson and Merton (1981)- hereafter HM- developed another model for testing market timing ability, which was later validated and applied by Henriksson (1984), and found that only 3 funds out of 116 exhibited significant positive market timing ability.

Kon and Jen (1979) found a large number of funds engaged in the market timing activities, but while extending their analysis, Kon (1983) found little evidence that they were successful. Chang and Lewellen (1984) also tested market timing and security selection skills of the fund managers and found little evidence of both. …

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