Timing and Selectivity Performance of Mutual Fund Managers: Application of Conditional Models to Indian Equity Diversified Mutual funds

Abstract

Investors prefer to invest in the mutual funds as the fund managers may augment the returns through their security selection and market timing skills. Both conditional and unconditional evaluation approaches are used in the assessment of these two skills. The conditional performance appraisal methodology eliminates some of the biases that affect conventional unconditional measures when assessing these two skills. This study analyses the security selection and market timing ability of 52 selected Indian equity diversified mutual fund (growth) schemes using conditional approaches. Study found that stock selectivity and market timing coefficients were positive and significant in less than 25% of sampled funds. However, one interesting thing is that study could not find any significantly negative stock selector. With respect to macro-forecasting or timing the market, evidence, however, was strong for “wrong” or “perverse” market timing. The negative correlation between stock picking and market timing coefficients indicates that Indian equity diversified scheme fund managers are unable to demonstrate prowess in both capabilities at the same time.