Persistence and Survivorship Bias In the Performance of Mutual Funds: An Indian Experience

Abstract

This study utilizes few selected performance evaluation techniques on a sample of 36 Indian mutual fund schemes, over the period of January 2001 to September 2009. The broad based S&P CNX NIFTY is used in the study as a benchmark. The study measures the performance using Capital Asset Pricing Model, Treynor-Mazuy model and Merton-Henriksson model. The results concluded that these 36 mutual fund managers were on average not able to predict security prices well enough to outperform a buy-the-market-and-holdpolicy. There was very little evidence of any individual fund being able to do significantly better than which was expected from random chance. On the other hand, no evidence of curvature of the characteristic lines, indicating superior timing skill, is found for any of the funds.

We have also examined the persistence in mutual fund performance with respect to the stock selection ability as well as timing ability of fund managers of the sample funds. The study offers little evidence of persistence in either the stock selection ability or the timing ability of the fund managers. Mutual fund attrition can create problems for a researcher because funds disappear due to presumably poor performance resulting into bias in research outcome. In this study we also revisit the mutual fund performance, including the disappeared mutual fund schemes during sample period. Overall 22 funds were traced which disappeared in due course during the period. By tracking disappearing funds, the study does not find any evidence of survivorship bias.

Keywords: mutual funds, performance, persistence, survivorship bias

JEL Classification: G11