In this study, we evaluate performance of the Indian fixed income mutual funds (MFs) using a comprehensive sample of 242 funds across 16 categories over a period -- April 2015 to March 2020. Using monthly holding period returns for the funds and 22 different benchmarks, we assess (a) investment style and style consistency applying the quadratic programming technique; (b) risk-adjusted returns of funds using single and multi-factor models; and (c) linear relationship between investment style consistency and risk-adjusted return for the funds using Pearson correlation coefficients.
Our findings indicate that (a) fund managers practice securities selection, but their securities selection ability fails to improve risk-adjusted returns; (b) higher style consistency leads to better risk-adjusted performance; and (c) investment style and style consistency have considerable impact on fund performance. The findings show that the funds that do not deviate from their stated investment style perform better than those that do on a risk-adjusted return basis. Investment style consistency is more important than the securities selection ability for a fund’s performance. This is possibly the first comprehensive study that examines the investment style, and style consistency and its relationship with risk-adjusted returns of Indian fixed income MFs and contributes to the growing body of research on performance evaluation of fixed income funds.
The implications of this study are as follows. First, maintaining consistent investment style is a valuable skill. Second, style analysis can aid in identifying misclassification of funds. And finally, style analysis is a better method for fund classification as compared to the method based on average duration and the type of securities held.
