Academic journal article IUP Journal of Applied Finance

Higher Order Moments Based Models to Evaluate the Performance of Mutual Funds: Indian Evidence

Academic journal article IUP Journal of Applied Finance

Higher Order Moments Based Models to Evaluate the Performance of Mutual Funds: Indian Evidence

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Mutual fund, as defined by SEBI (Mutual Funds) Regulations (1996)1, is "a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets" (p. 8).

Another definition of mutual fund as specified by Indian Institute of Banking and Finance states, "a type of financial intermediary that pools the funds of investors who seek the same general investment objective and invests them in a number of different types of financial claims (e.g., equity shares, bonds, money market instruments). These pooled funds provide thousands of investors with proportional ownership of diversified portfolios managed by professional investment managers. The term mutual is used in the sense that all its returns, minus its expenses, are shared by the fund's unit holders" (Baid 2007, p. 1).

In other words, mutual fund serves as an investment medium that permits many investors to come together and apportion their investible wealth in various securities and markets aligning with the investment objective of the fund and in the process benefitting from the professional expertise of the fund managers. Since these investors hold a proportionate amount of share in the mutual fund, they are known as unit holders and the fund managers charge fees in lieu of the services provided to the unit holders.

The Indian mutual fund industry is more than 50 years old. The establishment of Unit Trust of India (UTI) in the year 1963 by the Government of India and Reserve Bank of India (RBI) led to the advent of mutual fund industry in India. Gradually, public sector and private sector mutual funds entered the industry from 1987 and 1993, respectively. UTI was split up into two entities in 20022. As on March 31, 2003, 33 Asset Management Companies (AMCs) operated in India with Assets Under Management (AUM) being ...79,464 Cr. In October 2015, 43 AMCs function in India with AUM being ...13,24,165 cr as on October 31, 2015 (excluding fund of funds) offering 2,185 schemes.3

In the current scenario, mutual funds as a means of investment are attaining immense popularity and drawing the attention of investors at large to invest in various securities through expertise and knowledge of qualified professionals. Also, a number of benefits attached to mutual funds (safety and transparency, diversification, tax benefit, higher return potential, etc.) are making them favorite investment avenues for small as well as large investors to participate in and derive the benefit of the capital market growth.

A large number of investors have a sizeable amount of their funds being invested in mutual funds as conveyed by the average AUM for the quarter ended March 2016 being ...1 ,353 ,443 cr which was ...1 ,188,690 cr a year ago.

The above statistics illustrate the impressive growth of Indian mutual funds that have attracted the attention of researchers, acade mici ans, policy makers, indivi duals and institutional investors. Insightful evaluation of performance is fundamental for the vitality of any mutual fund. Mutual fund investors, indeed, are interested in knowing the performance of the mutual funds that are managing their money. Selection of better performing funds is reliant on timely and fair evaluation of performance of fund. In view of large investor interest and increasing importance of the mutual fund industry in India, performance evaluation of mutual funds is becoming essential. Mutual funds need to be persistently assessed to help investors make judicious decisions.

Performance Measurement and Performance Evaluation

Performance evaluation is a process that encompasses performance measurement. Performance measurement involves an approach of accurately calculating rate of return of any investment strategy of a fund over the evaluation period by considering risks undertaken. …

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