Volume 20, Number 2 Article by Soumya Guha Deb, Ashok Banerjee and B B Chakrabarti June, 2008
Persistence in Performance of Indian Equity Mutual Funds: An Empirical Investigation :
Persistence in the performance of fund managers has been a topic of interest to the finance fraternity for the last four decades. Globally, numerous studies have tested the persistence of mutual fund performance and their findings have generally been mixed in nature. In this study we explore persistence in the performance of equity mutual funds in India. Persistence refers to the ability of a fund to maintain its relative performance ranking over time. The authors investigated the persistence in performance of equity mutual funds in India using different performance proxies and time horizons, in order to find the impact, if any, of the length of the time horizon on the persistence of a fund.
The study used a regression approach and a contingency table approach to test persistence, and the results were further substantiated with a Spearman Rank Correlation Coefficient test. Their analysis shows moderate evidence of persistence. With shorter time horizons like three months or six months, many cases of reversal are observed but if the time horizon is one year, the persistence exhibited is quite prominent, particularly for growth funds. Again, when the time horizon is increased to more than one year, evidence of persistence weakens. Too many reversals occurring during a very short period (three months or six months) before equilibrium is reached may cause lowering of proportional persistence over such time horizons. The presence of short term (one year) persistence and the absence of long term (more than thirty months) persistence give the impression of market efficiency in the long run. On the whole, the results of this analysis suggest that the past performance of a fund is hardly a reliable guide to future performance for equity mutual funds in India, particularly over a very short or very long period of time.
Reprint No 08204