Market Timing Ability of Indian Mutual Funds

Available ONLINE www.visualsoftindia.com/journal.html VSRD-IJBMR, Vol. 1 (7), 2011, 416-427 RESEARCH ARTICLE Market Timing Ability of Indian Mutual Funds 1Surinder Kr. Miglani* ABSTRACT This paper analyzes Indian mutual fund managers’ market timing ability for the period of 1999-2004 using Jensen & Mazuy Module and Henriksson & Merton Module. To achieve the goal a sample of ninety eight mutual fund schemes having different investment objectives, both from public as well as private sector, have been selected. The study finds that Indian mutual fund managers are unable to test the market timing of the mutual fund schemes and relying only on stock selection skill for getting maximum return. It implies that they are generating superior performance due to largely involvement in security selection. Keywords: Net Assets Value, Benchmark, Market Timing, Selectivity, Alpha, Gamma Etc. 1. INTRODUCTION Mutual funds are dynamic financial institutions which play a crucial role in an economy by mobilizing savings and investing them in the capital markets. Therefore, the activities of Mutual funds have both short and long term impact on the savings, capital markets and the national economy. Mutual funds, thus, assist the process of financial deepings and intermediation. They mobilize funds in the savings market and act as complementary to banking, at the same time they also compete banks and other financial institutions. In the process stock market activities are also significantly influenced by Mutual funds. Mutual funds have attained commanding heights in the financial scenario of India. Till 1986, there was only one Mutual fund in our country because no other public or private sector institution was allowed by government of India to join Mutual fund market. In 1987, the Banking Regulation Act was amended to allow the commercial banks as well as Insurance sector to launch Mutual funds. The Mutual fund market added a new dimension in 1993 with the opening up of it to the private sector and foreign institutional investors. Now-a-days private as well as public, domestic as well as foreign sector, 38 Mutual funds players are in the market with total investible funds for Rs. 6,13,979 crore and having a number of 882 schemes, out of which 641 schemes are open ended, ____________________________ 1Assistant Professor, MBA Department, Apeejay Institute of Technology, School of Management, G.Noida, Uttar Pradesh, INDIA. *Correspondence : dr_surinder2006@yahoo.co.in Surinder Kr. Miglani / VSRD International Journal of Business & Management Research Vol. 1 (7), 2011 202 schemes are close ended and 39 schemes are Interval fund as on 31st March, 2010. In these days, saving for future is a main phenomena for Indians even a person is also interested for better opportunity. Mutual funds are ideal vehicles for individual investors who don’t have the time, willingness or ability to manage their own portfolio. Now these days’ different types of Mutual fund schemes are available in the market, which provide aggressive return to an aggressive investor at a level of risk. But an unknown investor is not aware about how to mobilize funds in the market & judge the ability of a fund manager. So, this paper analyzes the fund manager ability to test the market timing of mutual funds schemes. 2. LITERATURE REVIEW In view of large investor interest, the performance of Mutual fund managers needs continuously evaluated. A series of empirical studies have been performed with the market timing skills of Mutual fund managers in USA, Germany, UK, Netherlands, Belgium, Switzerland & Sweden. Most of the previous work finds little evidence that fund managers possess market timing ability. Treynor and Mazuy developed a methodology in 1966 for testing the market timing ability of Mutual fund manager. They had used 57 open-ended Mutual funds during the period of 1953-1962. They found no evidence that the investment managers of any of the 57 Mutual funds had successfully outguessed the market. Jensen (1968) evaluated the ability of the fund managers in selecting the under valued securities. He concluded the sample of 115 Mutual funds, the fund managers were not able to forecast security prices well enough to recover research expenses and fees. Henriksson and Merton (1981) had developed a statistical measure for parametric and non-parametric tests of market timing ability of fund managers. They suggested that if any mutual fund manager has an ability to forecast the future observation and his forecasting was observable, the parametric test could be used without further assumption on distribution of security returns. If his forecasting could not observable then, the parametric test can be used under the assumption of either CAPM or multi factor return structure could be used. These specifications permitted to mutual fund manager for identification and separation of gains of market timing skills. Ken and Jen (1979) Veite and Cheney (1982) Henriksson (1984) and Chang and Lewellen (1984) evaluated the performance of the Mutual fund managers in terms of their ability in market timing and selectivity. The conclusion of these studies is that the fund managers did not possess these abilities. Even if any little evidence is there regarding selectivity, the additional returns earned are not able to cover the research expenses. Keith Cuthbertson, Dirk Nitzsche and Niall O`Sullivan (2010) test the market timing skills of UK equity and balanced mutual funds. The methodology has used regression based tests of Treynor-Mazuy and Henriksson-Merton. They find a relatively small number of funds (around 1%) demonstrate positive market timing ability at a 5% significance level while around 19% of funds exhibit negative timing and on average funds miss-time the market. However, controlling for publicly available information they find very little evidence of market timing ability based on private timing signals. In terms of investment styles, there are a small number of successful positive market timers amongst Equity Income and `All Company` funds but not among either Small Stock funds or Balanced funds, although a few small stock funds are found to time a small stock index rather than a broad market index. Sarkar, Jaydeep, Majumdar and Sudipa (1994) evaluated the performance of only five close-ended growth oriented schemes in terms of Mutual fund managers’ ability to strike a balance between risk and return for a period of Feb. 1991 to Aug 1993, with particular emphasis on the sensational fluctuations in the Indian stock Page 417 of 427 Surinder Kr. Miglani / VSRD International Journal of Business & Management Research Vol. 1 (7), 2011 market during the first quarter of 1992. The results indicate that the fund managers covered under study have not been successful in reaping return in excess of the market or in insuring an efficient diversification of portfolio. Significant divergences in performance were found during the period of the upsurge in stock prices. Amitabh Gupta (2001) made a study on Investment management of Mutual funds. His main emphasis was to evaluate the performance of Mutual fund schemes and test the market timing abilities of mutual funds manager over a period of April 1, 1994 to March 31, 1999. Results of the study do not support the hypothesis. Nalini Prava Tripathi (2006) made a study on Market timing abilities and Mutual fund performance on equity linked saving schemes. Her study evaluates the market timing abilities of Indian fund managers of thirty-one tax planning schemes in India over the period Dec., 1995 to Jan., 2004. The study indicate that the fund managers have not been successful in reaping returns in excess of the market, rather they are timing the market in the wrong direction. Sanjay Sehgal & Manoj Jhanwar (2008), evaluated the performance of selected equity based 57 Mutual fund schemes for the period of Jan., 2000 to Dec., 2004. They conclude that the results timing ability, and to some extent stock selectivity improve when they use daily instead of monthly data. They feel that higher observation frequency captures the trading skills of more active fund managers in a better fashion. Their timing results are not an outcome of any spurious statistical phenomenon. The literature survey reveals that generally the Mutual fund managers are unable in stock selection and their market timing ability is also poor. However, despite the existence of the Mutual fund industry for over five decades in India, it is only in recent years that some efforts have been made to evaluate the Market timing ability of Mutual funds. The sample period of most of the earlier studies was rather too small or some studies have been conducted with specific schemes like either taking equity schemes or tax planning schemes. So, this study has been examined to evaluate the Market Timing Ability of Mutual Funds by using different types of schemes. 3. OBJECTIVE OF THE STUDY The main objective of the present study is to test the market timing abilities of the Mutual funds managers with the following hypotheses:-  Indian Mutual fund managers timing the market in right direction;  Close ended fund timing the market efficiently as compare to open ended fund;  Growth schemes fund are better performing as compare to other schemes fund. 4. RESEARCH METHODOLOGY A sample of ninety eight Mutual funds schemes having different objectives, both from public as well as private sector, have been selected to test the market timing abilities of the Indian fund managers. In this paper thirty seven schemes have been taken from public sector Mutual funds (including UTI) while sixty one schemes have taken from private sector Mutual funds. Of the total ninety eight schemes, eighteen schemes are close ended and eighty schemes are open ended in nature. Aim wise schemes are sixty five growth schemes, four income schemes, one balanced scheme and twenty eight tax planning schemes. The data used in study are comprise weekly Net Assets Value both for close ended as well as open ended schemes for the five year period from April Page 418 of 427 Surinder Kr. Miglani / VSRD International Journal of Business & Management Research Vol. 1 (7), 2011 1st, 1999 to March 31st, 2004. Appropriate adjustment have been made for bonus and right issues for each of the sample schemes in order to make the data comparable over time. Bombay stock exchange (BSE) National Index (1983-84=100) has used as a surrogate for market portfolio because it is a broad based index. The proxy for risk free return used in this paper is the weekly yield on 91-day Treasury bill. 4.1.Measurement of Return on Mutual Fund Schemes The average return on the sample Mutual fund schemes has been calculated as follows: - (a) NAV based scheme return Rpt = [NAVt –NAVt-1] \ NAVt-1 Where, Rp = return on fund; NAVt = Net asset value at t; NAVt-1 = the corresponding value at t-1. (b) Market price based scheme return Rm = MPt –MPt-1/MPt-1 Where, MPt = market price of a scheme for current week MPt-1 = market price of a scheme for the preceding week Average weekly returns are computed separately for the years 1999 to 2004. It may be noted here that financial year is the reference period for present analysis. Avr. Rp = (Rp1 + Rp2 + Rp3 + ……………+Rpn)/N Where, Rp1, Rp2, Rp3………Rpn are return for 1st, 2nd, 3rd and nth week based on NAVs N = total number of weeks of a year. Weekly market returns are calculated using the following equation. Avr. Rm = (Rm1 + Rm2 + Rm3 + ……….Rmn)/N Where, Avr. Rm = average weekly market return Rm1, Rm2, Rm3 ……Rmn are returns for the 1st, 2nd, 3rd, and nth week. This paper uses two modules - one of them was proposed by Treynor and Mazy (1966) and 2nd of them was proposed by Henrikson and Merton (1981) to test the market timing abilities of Indian fund managers Page 419 of 427 Surinder Kr. Miglani / VSRD International Journal of Business & Management Research Vol. 1 (7), 2011 4.2.Treynor and Mazuy Module Treynor and Mazuy module was developed by Treynor and Mazuy (1966). They suggested that in order to detect the market timing abilities of fund managers should add a squared term to the simple linear relationship module which are given as under: - Rp-Rf =  + (Rm-Rf) +  (Rm-Rf)2 + e Where, Rp = the return on the fund, Rm = the return on the market portfolio, Rf = the risk free term ep = the random error term and; ,  and  are parameters of the model The rational behind the equation is that if a fund manager is not engaged in market timing and concentrate at the stock selection, the average beta of the fund should be constant. In that case fund return would be straight-line linear relationship against market return. However, if the fund manager changes the cash position of the fund and beta position of the fund on time, but not successes in properly assessing the direction of the market, then plotting would still show a linear relationship. 4.3.Henriksson and Merton Module Henriksson and Merton (1981) developed a statistical framework for both parametric and non-parametric tests of market timing ability of fund managers. Henriksson and Merton module the fund beta would take only two values- a large value of the market is expected to do well if market return is greater than risk free return (Rm>Rf) and small value of the market not expected to do well if market return is less than risk free return (RmRf) and –1 for (Rm nguon tai.lieu . vn