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The mutual fund industry is a fast growing sector
of the Indian financial markets. They have become major vehicle for mobilization of savings, especially from the small and
household savers for investment in the capital market. Mutual funds entered the Indian capital
market in 1964 with a view to provide the retail investors the benefit of diversification of
risk, assured returns, professional management. Since then they have grown phenomenally
in terms of number, size of operations, investor base and scope. With the ushering in of
economic reforms in the early 1990s, the Government of India opened the way for the entry of
private sector and foreign players into this industry. Consequently, this has emerged as a
highly competitive financial service industry today. In India, the mutual fund industry came
into being with the establishment of Unit Trust of India in 1964. Public sector banks and
financial institutions began to establish mutual funds in 1987. The private sector and foreign
institutions were allowed to set up mutual funds in 1993. Mutual funds have all come forward
with varying schemes suitable to the needs of saving populace. By March 2005, there were
29 mutual funds and over 450 schemes in India, with assets under management of
Rs. 1,49, 600 cr.
In this study, we analyze the empirical results pertaining to the overall performance
of selected mutual fund schemes in terms of various performance measures. The focus
in evaluating the overall performance has been on fund manager's skills in security
selection, which involve micro forecasting—forecasting of price movements of individual stocks
and identifying under or overvalued stocks. But in
constructing a portfolio, timing of investment is as important as selection of securities.
Selection of good securities at the wrong time may not help the fund managers to
achieve the investment/diversification objectives. Starting
to ride the bullish trend by buying securities at its peak or offloading the securities in
bearish trend at its turning point will adversely affect the rate of return. Therefore, market timing
is a vital activity in the investment decision making process. It is possible for fund managers
to generate superior performance by timing the market correctly, in addition to stock
selection techniques. Thus, it could be possible that differential returns are generated not only
by careful `micro' security selection efforts but also by engaging in successful `macro'
market timing activities in the volatile stock markets. Successful fund managers are those who
are capable of assessing correctly the direction of the market, whether bull or bear, by
positioning their portfolios accordingly. If managers are expecting a declining market, they could
change their portfolio suitably by increasing the cash percentage of the portfolio or by adjust
their equity investments in favor of defensive securities having lower beta. In case of a
rising market, fund managers could reduce the cash position or adjust their equity portfolio in
favor of aggressive securities having higher beta. By adjusting their portfolios correctly to
the market timing, fund managers can generate superior returns compared to the market. |
