Debaditya MOHANTI and P. K. PRIYAN
Investing in mutual funds has made it possible for retail investors to experience the benefits of diversification and the competencies of fund managers. However, these benefits have not been without costs. Therefore, investors, whether retail or institutional, must scrutinise and evaluate the performance of various mutual funds particularly where the investments have been made in order to create the most effective asset mix. The purpose of the present study is to examine the investment style of the large-cap equity mutual funds in India using ‘style-exposure’ analysis proposed by Sharpe (1992). The study uses the constrained quadratic optimisation factor model on the monthly returns of large-cap Indian equity mutual funds and their relevant style indices to analyse the investment style and stock picking ability of the fund managers over the period January 2011 to April 2015. To capture the style of these funds, 18 mutually exclusive domestic and international asset classes have been taken as the style benchmarks in the present study.
Further, to assess the dynamic drift in the style of a fund, a rolling-period exposure style analysis of the funds have been carried out by using a 36 month rolling period window computed monthly. The study analyses the selection capability of each of the fund managers by computing a mean statistics of excess active return of the funds referred to as ‘mean selection return’. The results of the study show that the fund managers exhibit some level of active management rather than passively tracking the style benchmarks and also depict a good selection capability. However, results also portray that active management and good selection skills are in conjunction with the higher expense ratio of these funds. Further, the rolling-period exposure analysis displays a good amount of style consistency among all these mutual funds over the given period of time.
