Effect of Fund Size on the Performance of Balanced Mutual Funds: An Empirical Study in the Indian Context
D. N. Rao
Suresh Gyan Vihar University
S. B. Rao
All India Management Association
July 22, 2009
The study empirically researches the effect of fund size on the performance of select Balanced Funds. The total fund size/Assets managed by the sampled funds is Rs.2,802.04 crores (approximately US Dollars 0.6 billions) and the fund size varied from Rs.5.79 crores to Rs.726.69 crores (standard deviation of the fund size 224.7639). For the purpose of analysis, the select Balanced Funds have been classified into Micro-, Small-, Medium- and Large sized Balanced Funds. Open end, Balanced Mutual Fund schemes having at least three years track record are only considered for the study. The time period chosen for the study is 3 years (1st April 2006 to 1st April 2009). The total number of Open end Balanced Funds is 30 (Population) and the Sample size has been worked out to be 14 at 95% Confidence Level and Confidence Interval of 20%. Convenient sampling has been used for this purpose. Net Asset Values (NAV) of the select Balanced Funds were collected on the first trading day of each Quarter of the 3-year period for computing the return (CAGR), Risk and Return per unit of Risk, Risk Adjusted Return (Sharpe Ratio) of the funds. The NAV and fund size details were obtained from the home page of Association of Mutual Funds in India www.amfiindia.com) and the Asset Management Companies respectively. The average Risk-free rate has computed using the coupon (interest) offered by Government of India’s long-term debt securities during the period 2006-09 (www.rbi.org.in) which is 8%. Correlation coefficients between fund size and the four parameters of performance (Return, Risk, Return/Risk, Sharpe Ratio) were computed to ascertain the degree of relationship between fund size and performance of select balanced funds. Fund Momentum (the product of Fund Size and CAGR) ‘Return per Fund Size and Risk per Fund Size were computed to analyze the size effect. Analysis of Variance (ANOVA) was conducted to test the hypothesis whether the variance of performance variables among Micro, Small, Medium and Large Balanced Funds are significant at 5% significance level. Considering the standard deviation of fund size of the Funds (Micro-, Small-, Medium- and Large Balanced Funds), the standard deviation of the performance variables are found to be significantly low, implying that the fund size did not significantly impact the performance of balanced funds. At 5% significance level (Alpha=0.05), the four correlation coefficients (between fund size and performance variables) are less than the critical value implying that fund size did not significantly affect performance (Return, Risk, Return per Risk and Sharpe Ratio) of all the four groups of Balanced Funds. The Hypothesis testing at 5% significance level in the case of large sized balanced funds, the correlation coefficients of fund size with Return, Return per Risk and Sharpe ratio do not fall in the rejection region and hence the Null Hypotheses pertaining to Return, Return per Risk and Sharpe Ratio were not rejected. However, the Null Hypothesis pertaining to Risk is rejected leading to the acceptance of Alternate Hypothesis leading to the conclusion that Fund size does affect significantly the risk of large size balanced funds. The ANOVA of performance variables of Micro-, Small-, Medium-, Large Balanced Funds indicated that the observed value of F is less than the critical value in all the four cases (Return, Risk, Return per Risk and Sharpe Ratio) leading to non rejection of Null hypothesis. Further, it was observed that as the fund size increased Weighted Average Return per Risk (WAR*) and Weighted Average Sharpe Ratio (WAs) have improved, while Weighted Average Momentum declined. Finally, there is no conclusive evidence to suggest that the fund size affects the performance of Balanced Funds in the Indian Context.
Keywords: fund size, balanced funds, return, risk, return per risk, Sharpe Ratio, momentum of funds
JEL Classification: FEN, MRN
Date posted: July 25, 2009
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