Analysis of the Correlation between Rankings & Performance of Indian Mutual Funds: An Empirical Study

Abstract

The Indian mutual fund industry has witnessed substantial growth, especially following the 2017 "Mutual Funds Sahi Hai" campaign by the Association of Mutual Funds in India (AMFI). Investors often rely on past Net Asset Value (NAV), fund categories, prominent fund managers, and rankings to make investment decisions. However, rankings alone may not rigorously determine a fund’s future performance. This study explores the correlation between mutual fund rankings and their actual performance, emphasizing macro and micro forecasting techniques employed by fund managers.

The research utilizes the Treynor-Mazuy (1966) and Henriksson-Merton (1981) models to evaluate market timing and stock selection abilities of Indian mutual fund managers. Additionally, tracking error and the information ratio are analyzed to assess fund performance consistency. Findings indicate that while mutual funds in India consistently generate excess returns relative to benchmarks, fund managers exhibit weak market timing abilities but strong stock selection skills. Moreover, CMFR rankings do not necessarily correlate with higher returns, as funds with lower rankings often outperform those ranked higher.

This study highlights the need for a multi-metric evaluation approach for investment decisions, incorporating models like Treynor-Mazuy and Henriksson-Merton. It underscores that mutual fund rankings alone are not sufficient indicators of superior performance and that investors should consider additional performance metrics to make informed investment choices.