Mutual Funds as Anchors of Risk: Evidence from Indian Equity Funds

Abstract

Market rationality argument claims that investors tend to choose portfolios such that their returns are maximized and risks minimized. Keeping aside the behavioral portfolios, mutual fund managers are incentivized on the excessive risk-adjusted returns generated. These calls for a discussion of what risk a mutual fund manager be working towards. There are two kinds of risks-systematic and unsystematic, the former being unmeasurable and latter diversifiable. This study using 29 funds as sample, aims to answer the question through empirical analysis of selected Indian mutual funds and their performance in terms of risk-adjusted excess return generation. The two risk parameters used in this study are standard deviation (CML) and beta (SML). A hypothesis for the difference in the mean excess returns is also conducted. It was concluded that, Indian asset managers are efficient in delivering a risk-adjusted return that is satisfying the risk premium demanded for the unsystematic risk assumed.