TERM PAPER

Do Indian Mutual Funds

Time the Market?

Ganeshprasad Ravindra Pavaskar

249/54 PGP 1
IIM Calcutta

Sudhakar Reddy
Assistant Professor
IIM Calcutta

Analysis of
Open Ended and Active Indian Equity
Mutual Fund Universe 0 | P a g e
Table of Contents

1. Abstract .......................................................................................................................................... 3

2. Introduction ................................................................................................................................... 4

3. Methodology .................................................................................................................................. 6

Mutual Fund Data .............................................................................................................................. 6

Market Data ....................................................................................................................................... 8

4. Data - Qualitative analysis ............................................................................................................ 9

5. Data - Quantitative analysis ........................................................................................................ 12

6. Models .......................................................................................................................................... 14

CAPM Model ..................................................................................................................................... 14

Fama French Model ......................................................................................................................... 14

Carhart Model .................................................................................................................................. 15

Treynor and Mazuy Model .............................................................................................................. 15

Henriksson and Merton Model ....................................................................................................... 15

GARCH(1,1) Model .......................................................................................................................... 15

Busse Model ..................................................................................................................................... 16

7. Results .......................................................................................................................................... 17

8. Conclusion .................................................................................................................................... 19

9. Reference ..................................................................................................................................... 20

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Tables

Table 1: Number of equity fund inception data since 1987 in India ........................................................... 6

Table 2: Number of equity fund deactivation (through liquidation or merging) data since 1987
in India .................................................................................................................................................................................. 6

Table 3: Fund categorization in Indian equity market ...................................................................................... 7

Table 4: Data selection process and the number of funds in each category step .................................. 8

Table 5: Summary statistics of market data .......................................................................................................... 8

Table 6: Number of funds and asset under management (AUM) under each asset management
company(AMC) .................................................................................................................................................................. 9

Table 7: Size wise cauterization - number of funds and asset under management (AUM) ............... 9

Table 8: Number of fund inceptions per year (all are active at 31st may 2018) and current AUM
............................................................................................................................................................................................... 10

Table 9: Category wise mutual fund data ............................................................................................................ 10

Table 10: Subcategory wise mutual fund data .................................................................................................. 10

Table 11: Class wise mutual fund data ................................................................................................................. 11

Table 12: Average Return, Volatility and Sharpe Ratio achieved by Each AMC .................................. 12

Table 13: Average Return, Volatility and Sharpe Ratio achieved in each Category ........................... 13

Table 14: Summary of monthly factor measures ............................................................................................. 17

Table 15: Summary of daily factor measures .................................................................................................... 17

Table 16: Summary of estimated beta measures using monthly data ..................................................... 17

Table 17: Summary of estimated beta measures using daily data ............................................................ 18

Table 18: t-statistics of market timing analysis using monthly data ....................................................... 18

Table 19: t-statistics of market timing analysis using daily data .............................................................. 18

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 1. Abstract

Aim of the project is to check the market timing ability of the Indian mutual funds. We
have used open-ended active equity mutual funds. We used adjusted NAV values of
mutual funds, which originated after 1994 and before 2016. We used qualitative data to
analyse the open ended active equity mutual funds universe. We checked which type of
mutual funds are more prevalent and which categories of mutual funds have better AUM
growth and better returns. Mutual funds Results show that mutual funds have generated
good CAGR over the years. However, market return timing ability of the open-ended
active equity mutual funds is limited. About 40% of funds exhibit the high t-stat for
positive betas in Treynor and Mazuy model and Henriksson and Merton model and 30%
for Busse Model. What it means is that fund managers tend to time the market return
better than volatility while looking at monthly returns. The trend becomes reverse when
we use daily data. About 15% of funds exhibit successful return timing ability and 18%
exhibit successful volatility return abilities.

Keywords: Open ended active equity mutual funds, Mutual Funds, Indian Equity,
Market Timing, Carhart Model, Treynor and Mazuy model, Henriksson and Merton
model, Busse model, Return Timing, Volatility Timing

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 2. Introduction
The motivation came from the paper that evaluated the Chinese mutual fund market it is
tilted ‘Do Chinese mutual funds time the market?’ by Li Yi et al. Following this direction,
we are going to analyse data from only Indian mutual funds and in this regard, no global
equity or hybrid mutual funds will be considered in the analysis. The pertinent question
arises that whether mutual fund managers really have the ability to correctly and
consistently time the market. Many researchers have worked in this area. The work is
mostly done in the developed market. The first paper was in this field was written by
Treynor and Mazuy in 1966. Later plethora of academicians have come up with their
analysis and news models. With the advent of better technologies and models, it is
possible to analyse daily data from inception in limited time.

Aim of the mutual fund managers is to increase the investors return with some
constraints on defined in the mutual fund scheme document. If the managers accurately
and consistently anticipate market movements then investors will greatly profit from
their timing skills. After Treynor and Mazuy many researchers have come up with
different models. Following are the names to name a few: Henriksson and Merton in
1981, Henriksson in 1984, Jagannathan and Korajczyk in 1986, Ferson and Schadt in
1996, Goetzmann in 2000, Bodson in 2013, Ferson and Mo in 2016

As managers try to time the market returns, mutual fund managers also try to time the
market volatility and the market liquidity. Busse, in 1999, evaluated market timing of
managers with respect to volatility and checked whether it is possible to have accurate
and persistent volatility timing. Volatility timing can be explained as following: When
present volatility is high (low), mutual fund managers can expect future volatility to be
high (low) and thereby decrease (increase) their portfolios’ market exposure. Using daily
mutual fund returns, Busse (1999) provides the first test of volatility timing and
demonstrates that mutual fund managers are successful volatility timers. After Busse in
1999, many researchers have tasted whether managers are able to time the market
volatility and the liquidity. Following are the names to name a few: Giambona and Golec
in 2009, Kim and In in2012, Bodson in 2013, and Ferson and Mo in 2016

We are trying to calculate only the market timing abilities with respect to market returns
and the market volatility. For this, we have collected the data from two databases ACE

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mutual fund database and LIPPER database. We have explained the data collection in the
section two. The mutual fund data and the market data. In the section three and four, we
have explained the qualitative and quantitative analysis of the selected mutual funds and
the market data. In the section five, we have explained the model and the equations in
detail. In the section six, we have discussed the results in detail and determined whether
Indian mutual funds are able to time the market. We have performed the analysis using
daily and monthly returns separately and checked whether the two datasets offer the
different explanations.

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 3. Methodology
We received mutual fund data from the two databases ‘ACE mutual fund’ and the ‘Lipper
Database’. Moreover, we have obtained market data from ‘Fama French and Momentum
Factors: Data Library for Indian Market’. In the next two subsections, will discuss the
selection and screening of the data.

Mutual Fund Data

Initially we have selected Equity funds, which is 2757 in numbers across 37 AMCs. The
data is obtained from the inception to May 2018. We have obtained data for following
parameters.

Scheme Name, AMC Name, Scheme Name, Class Name, ETF, Primary Fund, Status,
Inception Date, Inception NAV, Benchmark Indices, Class Name, Asset Type, Category, Sub
Category, Investment, Min Investment, Max Investment, AMC, Fund Name, Entry Load,
Exit Load, Ratio, Date, daily NAV and adjusted NAV and yearly AUM (in INR crore) data.

Table 1: Number of equity fund inception data since 1987 in India

Year Inceptions Year Inceptions Year Inceptions

(blank) 20 2000 39 2010 61
1987 1 2001 15 2011 31
1992 4 2002 34 2012 22
1993 8 2003 34 2013 748
1994 5 2004 89 2014 252
1995 19 2005 125 2015 272
1996 21 2006 86 2016 73
1997 16 2007 136 2017 213
1998 20 2008 139 2018 138
1999 40 2009 96 Total 2757

Table 2: Number of equity fund deactivation (through liquidation or merging) data since 1987 in India

Year Deactivations Year Deactivations Year Deactivations

2009 21 2015 38
2002 2 2010 20 2016 91
2004 2 2011 73 2017 118
2005 1 2012 36 2018 122
2007 7 2013 60
2008 6 2014 63 Total 660

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We removed exchange-traded funds from the list and we were left with 2701 mutual
funds. Some mutual funds were inactive because they were liquidated or merged with
currently active mutual funds. We were left with 1482 open ended active mutual funds.

Table 3: Fund categorization in Indian equity market

Exchange Traded Funds Mutual Funds Total

Open End Fund 56 1981 2037
Active 52 1482 1534
Liquidated 56 56
Merged 4 443 447
Closed End Fund 720 720
Active 480 480
Liquidated 220 220
Merged 20 20
Total 56 2701 2757

We have further analysed the data by comparing Ace database data to the Lipper
database. It turned out few mutual funds are double counted in ACE mutual fund. A
comparison code was written in excel to check for the repetitions. We further found that
some of the mutual funds were incorrectly categorised. E.g., some fund were ETF and
some were close ended; some were foreign equity and some were non-equity mutual
funds; (it turned out non-equity funds were hybrid mutual funds). We have compared
that with LIPPER data base and removed the repetitions. The comparison code used fuzzy
look up and the NAV values of comparison. In the comparison process, Mutual funds were
segregated with respect to the AMC so that comparison will yield the highest accuracy. At
the end, a manual check has been performed to ensure that all mutual funds are correctly
chosen and there are no false positives and false negatives while selecting the data.

We have chosen only those companies who has data for more than 30 months. I.e. any
mutual fund, which has originated in and after 2016 were rejected because sample space
for the monthly data is too small. Moreover, there were only 19 mutual funds that were
launched before 1994. Therefore, we rejected those 19 mutual funds because we did not
have the factor data for the regression before 1994. Only a few with very small AUM were
existed before 1994 compared to post 2000s era. Therefore, final estimation/ analysis
will not suffer from inaccuracy. In the end, we were left with 1198 mutual funds spanning
across 37 mutual funds. Further, we used data, which spans across.

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Table 4: Data selection process and the number of funds in each category step

Data Shortlisting Stages Count

Full Data 2757
Mutual Funds 2701
Open Ended Funds 2037
Active Funds 1482
Usable Number of MF 1198

Market Data
Factor model has been used to evaluate performance of mutual funds. The first paper to
do this was Carhart in 1997. The return values were calculated as holding period returns.
The daily returns are compounded to calculate monthly and yearly returns. The returns
and the break-points are recalculated from the beginning of the period each time we
update the results. There were two sets of data available, Survivorship-Bias adjusted
values and Survivorship-Bias unadjusted values. We have used Survivorship-Bias
adjusted values. Same data is used to estimate the volatilities. Following data is collected
from 1 Jan 1994 to 31 May 2018. The data is collected daily and monthly.

Date/Month, SMB, HML, WML, Market Return, Risk Free Rate

Time Period Covered: Start Month – October 1993; Last Month – May 2018.

Table 5: Summary statistics of market data

Last month Last 3 months Year to date Since 01-Jan-1994

Market Premium % -3.2 -1.9 -5.8 4.2
SMB % -5.2 -7.9 -11.4 0.4
HML % -2.2 -12 -21.4 7.9
WML % 5.1 16.1 18.1 18.2

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 4. Data - Qualitative analysis

We have analysed the data, which we have collected. We are reporting some statistics
about the open ended equity mutual fund universe in India.

Table 6 shows how these 1198 mutual funds are spread across the AMCs. HDFC MF,
Reliance Nippon MF, SBI MF has the highest asset under managed in these mutual fund
category. Moreover, Number of variety is offered by Reliance Nippon MF is highest among
these AMCs. AUMs are in Crore INR.

Table 6: Number of funds and asset under management (AUM) under each asset management company(AMC)

No. AMC Count AUM No. AMC Count AUM

1 Aditya Birla SL MF 80 63810 20 JM MF 28 2473
2 Axis MF 16 25269 21 Kotak MF 32 29173
3 Baroda Pioneer MF 23 930 22 L&T MF 32 25577
4 BNP Paribas MF 16 3110 23 LIC MF 32 1208
5 BOI AXA MF 24 355 24 Mirae MF 16 14559
6 Canara Robeco MF 19 5622 25 Motilal Oswal MF 16 16671
7 DHFL Pramerica MF 25 915 26 PPFAS MF 2 1077
8 DSP BR MF 36 31456 27 Principal Pnb MF 28 3667
9 Edelweiss MF 28 1340 28 Quant MF 26 28
10 Essel MF 14 196 29 Quantum MF 4 944
Franklin Templeton Reliance Nippon
11 MF 46 33691 30 MF 106 61515
12 HDFC MF 44 75597 31 Sahara MF 52 45
13 HSBC MF 20 2293 32 SBI MF 66 51081
14 ICICI Pru MF 78 53708 33 Sundaram MF 41 14941
15 IDBI MF 20 1720 34 Tata MF 62 10717
16 IDFC MF 32 16053 35 Tata MF 34 409
17 IIFL MF 4 242 36 Taurus MF 2 211
18 Indiabulls MF 4 398 37 Union MF 54 33716
19 Invesco MF 36 3958 Total 1198 588673

We have decided to categorise the MFs according to their relative size. If the AUM is more
than 10000 crore INR in a particular scheme, we labelled it ‘LARGE’. If the AUM is less
than 1000 crore INR then we labelled it as a ‘SMALL’ MF fund.

Table 7: Size wise cauterization - number of funds and asset under management (AUM)

No. Size Count AUM

1 LARGE (>10000 Cr) 50 190111
2 MEDIUM 421 349110
3 SMALL (< 1000 Cr) 727 49452
Total 1198 588673

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We see a significant rise in number of inceptions in 2013. These mutual funds currently
hold more than 25% of the entire open ended equity mutual fund universe that are
currently active.

Table 8: Number of fund inceptions per year (all are active at 31st may 2018) and current AUM

No. Inception Year Count AUM No. Inception Year Count AUM
1 1994 11 6645 13 2006 41 19209
2 1995 11 34084 14 2007 56 47436
3 1996 13 29127 15 2008 71 28753
4 1997 4 6 16 2009 50 46457
5 1998 13 14051 17 2010 41 9723
6 1999 19 16124 18 2011 10 2032
7 2000 19 2091 19 2012 49 36642
8 2001 6 4752 20 2013 500 162361
9 2002 20 31080 21 2014 38 21225
10 2003 19 5920 22 2015 94 18513
11 2004 50 27484
12 2005 63 24958 Total 1198 588673

1998 MFs that we finalised are classified into 7 different categories, 21 different
subcategories, and 25 different classes. For some mutual funds (306), subcategory data
is missing. More than 6% of the AUM is under the category market cap fund.

Table 9: Category wise mutual fund data

No. Category Count AUM

1 Equity Linked Savings Scheme 150 79416
2 Focused Fund 58 31265
3 Index Funds 80 3301
4 Market Cap Fund 501 366092
5 Sector Funds 235 33850
6 Thematic Fund 127 27105
7 Value Fund 47 47644
Total 1198 588673

We see about 40% AUM is in the Large Cap and the Multi Cap fund category.
Table 10: Subcategory wise mutual fund data

No. Subcategory Count AUM No. Subcategory Count AUM

1 Auto 4 1648 13 Large Cap Fund 152 108566
Banks & Financial
2 55 9092 14 Mid Cap Fund 89 62323
Services
3 Consumption 36 3920 15 MNC 12 8856
4 Contra 12 3770 16 Multi Cap Fund 123 114475
5 Dividend Yield 20 4982 17 Other 4 18
6 Energy & Power 20 2285 18 Pharma & Health 20 3360
7 Global 32 505 19 Service Industry 4 701
8 Index - Nifty 50 2746 20 Small cap Fund 51 35251

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 9 Index - Nifty Next 50 8 287 21 TECk 14 671
10 Index - Sensex 18 251 22 (blank) 306 167317
11 Infrastructure 82 12174
12 Large & Mid Cap 86 45477 Total 1198 588673

Table 11 shows the categorization of the mutual funds in according their mutual fund
class.

Table 11: Class wise mutual fund data

No. Class Count AUM No. Class Count AUM

Equity - Sectoral Fund -
1 Equity - Contra Fund 12 3770 14 Pharma & Health Care 20 3360
Equity - Dividend Yield Equity - Sectoral Fund -
2 Fund 20 4982 15 Service Industry 4 701
Equity - Sectoral Fund -
3 Equity - ELSS 150 79416 16 TECk 14 671
4 Equity - Focused Fund 58 31265 17 Equity - Small cap Fund 51 35251
Equity - Large & Mid Cap Equity - Thematic Fund -
5 Fund 86 45477 18 Global 32 505
Equity - Thematic Fund -
6 Equity - Large Cap Fund 152 108566 19 MNC 12 8856
Equity - Thematic Fund -
7 Equity - Mid Cap Fund 89 62323 20 Other 51 8993
8 Equity - Multi Cap Fund 123 114475 21 Equity - Value Fund 47 47644
Equity - Sectoral Fund -
9 Auto 4 1648 22 Index Funds - Nifty 50 2746
Equity - Sectoral Fund - Index Funds - Nifty Next
10 Banks & Financial Services 55 9092 23 50 8 287
Equity - Sectoral Fund -
11 Consumption 36 3920 24 Index Funds - Other 4 18
Equity - Sectoral Fund -
12 Energy & Power 20 2285 25 Index Funds - Sensex 18 251
Equity - Sectoral Fund -
13 Infrastructure 82 12174 Total 1198 588673

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 5. Data - Quantitative analysis
Table 12 shows the returns calculations performed using daily Adjusted NAV and
monthly adjusted NAV values of mutual funds. The returns and volatility is averaged over
time and over AMCs.

Table 12: Average Return, Volatility and Sharpe Ratio achieved by Each AMC

Daily Average Monthly Average 1 Year Average

Sharpe Sharpe AUM
Returns Volatility Ratio Returns Volatility Ratio CAGR growth
Aditya SL MF 0.056% 1.08% 2.75% 1.45% 5.58% 15.87% 12.88% 47.41%
Axis MF 0.064% 0.86% 4.11% 1.54% 4.27% 22.29% 23.16% 49.93%
Baroda MF 0.035% 1.11% 0.66% 0.81% 6.51% 6.48% 8.50% 24.57%
BNP MF 0.049% 1.04% 2.31% 1.36% 5.54% 15.11% 7.86% 33.36%
BOI AXA MF 0.047% 1.07% 2.03% 1.14% 6.59% 12.09% 22.09% 117.11%
Canara MF 0.057% 1.07% 2.75% 1.54% 5.84% 16.82% 11.26% 31.64%
DHFL MF MF 0.052% 0.94% 2.87% 1.16% 4.89% 14.62% 8.34% 37.49%
DSP BR MF 0.055% 1.09% 2.60% 1.50% 5.79% 16.06% 7.91% 45.46%
Edelweiss MF 0.051% 0.95% 2.53% 1.29% 4.77% 15.59% 14.83% 9.49%
Essel MF 0.053% 0.77% 3.45% 0.46% 6.38% 12.25% 6.54% 56.12%
Franklin T MF 0.055% 1.06% 2.78% 1.42% 5.53% 16.04% 12.77% 13.00%
HDFC MF 0.056% 1.13% 2.61% 1.45% 5.91% 15.40% 9.61% 30.91%
HSBC MF 0.047% 1.17% 1.97% 1.41% 6.16% 14.27% 9.96% 20.60%
ICICI Pru MF 0.058% 1.04% 3.02% 1.41% 5.42% 16.45% 12.19% 23.19%
IDBI MF 0.058% 0.86% 3.91% 1.41% 4.25% 20.08% 11.56% 2.76%
IDFC MF 0.049% 1.00% 2.33% 1.32% 4.99% 15.15% 14.88% 269.77%
IIFL MF 0.044% 0.92% 1.98% 1.00% 4.14% 11.13% 10.59% -29.30%
Indiabulls MF 0.046% 0.92% 1.75% 1.13% 4.07% 13.14% 10.38% 1024.11%
Invesco MF 0.053% 1.02% 2.67% 1.41% 5.59% 15.61% 13.49% 37.98%
JM MF 0.040% 1.08% 0.98% 1.04% 5.76% 8.46% 8.26% 36.71%
Kotak MF 0.053% 1.02% 2.68% 1.45% 5.53% 16.62% 9.39% 75.00%
L&T MF 0.060% 1.03% 3.39% 1.55% 5.50% 18.80% 12.17% 170.05%
LIC MF 0.035% 1.15% 0.86% 0.94% 5.56% 8.31% 8.01% 19.76%
Mirae MF 0.072% 0.89% 5.21% 1.72% 4.49% 26.41% 14.03% 169.98%
Motilal MF 0.079% 0.90% 5.89% 1.80% 4.09% 30.09% 11.07% 87.83%
PPFAS MF 0.070% 0.63% 6.28% 1.52% 3.20% 29.14% 16.71% 36.34%
Principal MF 0.056% 1.11% 2.67% 1.44% 5.94% 15.85% 13.13% 29.47%
Quant MF 0.045% 1.13% 1.73% 1.25% 5.99% 12.59% 9.06% 2.83%
Quantum MF 0.057% 1.00% 3.09% 1.44% 5.37% 16.80% 4.34% 12.73%
Reliance MF 0.049% 1.07% 1.95% 1.29% 5.58% 12.40% 10.62% 21.69%
Sahara MF 0.044% 1.14% 1.38% 1.24% 6.46% 10.86% 4.46% -10.67%
SBI MF 0.053% 1.09% 2.53% 1.35% 5.71% 14.95% 13.04% 22.35%
Sundaram MF 0.052% 1.12% 2.41% 1.18% 7.45% 12.60% 10.60% 42.35%
Tata MF 0.064% 0.98% 3.95% 1.40% 5.33% 16.35% 15.84% 109.17%
Tata MF 0.044% 1.11% 1.52% 1.12% 6.54% 10.21% 11.45% 510.54%
Taurus MF 0.036% 0.87% 0.59% 0.91% 4.16% 7.57% 7.02% 8.51%
Union MF 0.051% 1.05% 2.29% 1.35% 5.41% 14.65% 10.59% 10.62%

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Table 13 shows the returns calculations performed using daily Adjusted NAV and
monthly adjusted NAV values of mutual funds. The returns and volatility is averaged over
time and over various mutual fund categories.

Table 13: Average Return, Volatility and Sharpe Ratio achieved in each Category

Daily Average Monthly Average 1 Year Average

Sharpe Sharpe AUM
Returns Volatility Ratio Returns Volatility Ratio CAGR growth
ELSS 0.057% 1.01% 3.19% 1.44% 5.31% 17.69% 11.65% 41.42%
Focused
Fund 0.052% 1.03% 2.38% 1.20% 5.65% 14.26% 12.34% 111.08%
Index
Funds 0.043% 1.03% 1.21% 1.06% 4.74% 10.18% 12.67% 239.49%
Market
Cap Fund 0.055% 1.04% 2.78% 1.38% 5.67% 15.85% 10.44% 45.86%
Sector
Funds 0.049% 1.14% 2.13% 1.29% 6.35% 12.66% 10.95% 60.65%
Thematic
Fund 0.048% 1.00% 2.23% 1.18% 5.07% 12.93% 15.01% 22.88%
Value
Fund 0.060% 1.06% 3.20% 1.58% 5.86% 17.83% 11.97% 70.53%

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 6. Models

Market timing models are utilized to evaluate ability of fund managers to adjust their
portfolios' market exposure according to their market forecasts about future market
conditions. A variety of timing models differ in the dimensions of the market conditions
they time. Our aim is to investigate the market timing ability of mutual fund managers
from two different dimensions, i.e., return timing, volatility timing. We estimate timing
ability for mutual funds using the Carhart (1997) four factor model as our benchmark
model. To do this we first estimated the building blocks of Carhart model. Carhart model
is four factor model which is built on FAMA French model which is in turn built on CAPM
single factor model.

CAPM Model

CAPM model is just one factor model where it uses excess return (Rm) over market
returns. We have regressed the daily/monthly returns of to see betas of each mutual fund.

𝑅𝑖,𝑡 = 𝛼 + 𝛽𝑖 𝑅𝑚,𝑡 + 𝜖𝑖,𝑡

Ri,t is the excess return of fund i over the risk-free return in period t
Rm,t is the market excess return in period t
αi is the abnormal return of fund i over period t.
βi is the regression coefficient of fund i on factor j.
ϵi,t is the error term of fund i in month t

Fama French Model

This model is three factor model with excess return (Rm) over market, Small [market
capitalization] Minus Big (Rsmb) and High [book-to-market ratio] Minus Low (Rhml). We
have regressed the daily/monthly returns of to see betas of each mutual fund.

𝑅𝑖,𝑡 = 𝛼 + ∑ 𝛽𝑖,𝑗 𝑅𝑗,𝑡 + 𝜖𝑖,𝑡

𝑗=1

R1,t, R2,t, R3,t are Rm,t, Rsmb,t, Rhml,t in the Fama French three factor model.
Βi,1 , Βi,2 , Βi,3 are the regression coefficient of fund i on Rm,t, Rsmb,t, Rhml,t factors.

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Carhart Model

Carhart model uses Fama French three-factor model to construct a four-factor model.
The fourth factor is momentum factor (Rmom)
4

𝑅𝑖,𝑡 = 𝛼 + ∑ 𝛽𝑖,𝑗 𝑅𝑗,𝑡 + 𝜖𝑖,𝑡

𝑗=1

R1,t, R2,t, R3,t, and R4,t are Rm,t, Rsmb,t, Rhml,t , Rmom,t in Carhart four factor model.

Βi,1 , Βi,2 , Βi,3 , Βi,4 are the regression coefficient of fund i on Rm,t, Rsmb,t, Rhml,t, Rmom,t factors.

Return timing is concerned with forecasts of market return. Two return timing models
are widely used: the Treynor and Mazuy in 1966 and Henriksson and Merton in 1981
model. Treynor and Mazuy model states that the market exposure relies linearly on
market realized return. Henriksson and Merton model describes that market exposure
relies on directional response of the market.

Treynor and Mazuy Model

𝑅𝑖,𝑡 = 𝛼 + ∑ 𝛽𝑖,𝑗 𝑅𝑗,𝑡 + 𝛾𝑖 𝑅𝑚,𝑡 𝑅𝑚,𝑡 + 𝜖𝑖,𝑡

𝑗=1

The coefficient γi measures return timing of fund i and is expected to be significantly

positive if the fund manager possesses superior return timing ability.

Henriksson and Merton Model

𝑅𝑖,𝑡 = 𝛼 + ∑ 𝛽𝑖,𝑗 𝑅𝑗,𝑡 + 𝛾𝑖 𝑅𝑚,𝑡 𝑆𝑡 + 𝜖𝑖,𝑡

𝑗=1

St is a binary variable (indicator function) where St=1 if Rm,t > 0 and St=0 otherwise.

GARCH(1,1) Model

Volatility estimations are done using daily return data and the GARCH (1,1) model. This
volatility data is later used in estimating the volatility timing of the mutual funds. We have

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used Likelihood function maximization and the autocorrelation analysis to see whether
the GARCH model is appropriate to estimate daily volatilities.

2 2
𝜎𝑛2 = 𝜔 + 𝛼𝑅𝑛−1 + 𝛽𝜎𝑛−1

𝜔
𝑉̅𝑚 =
1−𝛼− 𝛽

Rn-1 is return in period n-1

σn , σn-1 standard deviation at period n and n-1
Vm is the mean of market volatility.
ω, α, β are estimated using a maximum likelihood function maximization technique.

Busse Model

𝑅𝑖,𝑡 = 𝛼 + ∑ 𝛽𝑖,𝑗 𝑅𝑗,𝑡 + 𝛿𝑖 𝑅𝑚,𝑡 (𝑉𝑚,𝑡 − 𝑉̅𝑚 ) + 𝜖𝑖,𝑡

𝑗=1

Vm,t is the market volatility in month t as measured by the conditional variance from
GARCH(1,1) model.
δi measures volatility timing of fund i.

A significant and negative δ coefficient represents successful volatility timing because it

represents decreasing fund exposure as market volatility increases.

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 7. Results

Table 14: Summary of monthly factor measures

Mean STD Min 1st Quartile Median 2nd Quartile Max

Rm 0.0063 0.0763 -0.2860 -0.0374 0.0070 0.0555 0.3543
Rsmb 0.0018 0.0496 -0.1457 -0.0265 0.0002 0.0331 0.1896
Rhml 0.0081 0.0666 -0.1460 -0.0312 0.0001 0.0429 0.3200
Rmom 0.0167 0.0738 -0.2582 -0.0229 0.0196 0.0525 0.3450
Vm 0.0004 0.0127 -0.0761 -0.0042 0.0024 0.0069 0.0488

Table 15: Summary of daily factor measures

Mean STD Min 1st Quartile Median 2nd Quartile Max

Rm 0.00030 0.01420 -0.11478 -0.00637 0.00097 0.00768 0.14922
Rsmb 0.00005 0.00916 -0.09638 -0.00484 0.00044 0.00528 0.06038
Rhml 0.00036 0.01048 -0.07651 -0.00533 -0.00008 0.00563 0.09843
Rmom 0.00076 0.01066 -0.07780 -0.00398 0.00125 0.00585 0.07774
Vm 0.10178 0.01460 0.06634 0.09334 0.09613 0.10393 0.28814

Table 14 and Table 15 presents the estimated factors for the regressions. The alpha is the
excel returns obtained after the regression. Rm is the excess return variable of the
regression. The average excess return monthly is 0.006 with a minimum value is -0.28
and maximum value being 0.354. The average excess return daily is 0.0003 with a
minimum value is -0.115 and maximum value being 0.14922. Similarly, other statistics
has been presented in these tables.

Table 16 and Table 17 presents the estimated factors of the regression using Carhart
model. For monthly data after running 1198 regressions average alpha 0.001 with
minimum is -0.042 and the maximum is 0.012. Average beta of market excess returns is
0.944 with maximum of 1.476 and minimum is 0.219. Similarly, other statistics is
presented in the table.

Table 16: Summary of estimated beta measures using monthly data

Mean STD Min 1st Quartile Median 2nd Quartile Max

Alpha 0.001 0.004 -0.042 -0.001 0.001 0.003 0.012
Rm 0.944 0.219 -0.914 0.872 0.972 1.053 1.476
Rsmb 0.045 0.175 -0.727 -0.068 0.028 0.134 0.627
Rhml -0.018 0.121 -0.598 -0.085 -0.022 0.040 1.275
Rmom 0.007 0.113 -0.972 -0.044 0.019 0.069 1.397

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 Table 17: Summary of estimated beta measures using daily data

Mean STD Min 1st Quartile Median 2nd Quartile Max

Alpha 0.000 0.000 -0.001 0.000 0.000 0.000 0.000
Rm 0.931 0.157 0.057 0.885 0.956 1.015 1.343
Rsmb 0.024 0.159 -0.400 -0.075 0.005 0.132 0.470
Rhml 0.007 0.104 -0.360 -0.062 -0.001 0.073 0.566
Rmom 0.030 0.073 -0.275 -0.006 0.034 0.077 0.220

Table 18 and Table 19 is the results table, which estimates market return and the volatility
timing. Highlighted column represents how much percentage of the mutual funds are able to
time the market.

The monthly data suggests that high percentage of the mutual funds are able to time the market
returns as well as volatility. In the case of Treynor and Mazuy model, 43% of the mutual
funds are able to time the market. While using Henriksson and Merton model, 40%
mutual funds are able to time the market returns. However, only 30% of the mutual
funds are able to time the volatility.

Table 18: t-statistics of market timing analysis using monthly data

t ≤−2.326 t ≤−1.960 t ≤−1.645 t ≤−1.282 t ≥+1.282 t ≥+1.645 t ≥+1.960 t ≥+2.326

Return TM 12% 14% 18% 23% 43% 39% 34% 28%

Timing HM 8% 11% 14% 20% 40% 33% 27% 22%
Volatility
Timing VT 24% 26% 28% 31% 30% 24% 20% 15%

The daily data suggests the reverse result. The amount of mutual funds, which can time the
market, drops very low. It suggest that timing returns so frequently can be harder for the
mutual fund managers. However, percentage of successful volatility timers is more than return
timers. The daily data suggests that low percentage of the mutual funds are able to time the
market returns as well as volatility. In the case of Treynor and Mazuy model, 15% of the
mutual funds are able to time the market. While using Henriksson and Merton model,
14% mutual funds are able to time the market returns. However, only 30% of the
mutual funds are able to time the volatility.

Table 19: t-statistics of market timing analysis using daily data

t ≤−2.326 t ≤−1.960 t ≤−1.645 t ≤−1.282 t ≥+1.282 t ≥+1.645 t ≥+1.960 t ≥+2.326

Return TM 12% 16% 23% 31% 15% 9% 7% 5%

Timing HM 13% 18% 24% 31% 14% 9% 4% 3%
Volatility
Timing VT 15% 17% 20% 24% 18% 11% 7% 5%

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 8. Conclusion

In this term paper, we have tried to explore the question whether Indian equity fund
managers are able to time the Indian equity market. Even though there is a large number
mutual funds are available, we are using a select number of mutual funds which are open
ended mutual funds. The year 2013 has spurred large number of new mutual fund
schemes. We chose mutual funds, which originated after 1994 and before 2016. The basic
statistics such as average returns, average volatility, CAGR, AUM growth and Sharpe ratio
for each fund is also determined. The mutual funds are separated according to mutual
fund category and subcategory, size and type of the fund. The statistics is presented
according these categorizations.

We have used Carhart model to estimate the appropriate betas. We have examined the
market timing abilities of the fund using two dimensions, market returns and market
return volatility for each mutual fund. We have also estimated the results of market
timing abilities on all mutual funds individually. The results are presented as Open Ended
and Active Indian Equity Mutual Fund as an entire cluster. The process is carried out
using daily as well as monthly adjusted NAV because recent study suggested that daily
data is able to explain the mutual fund behaviour better.

Market has rallied in the most part of the last 5 years, which made mutual funds perform
at very good CAGR. Market timing abilities are about 40% if we consider monthly data.
The t-statistics provides a good evidence that funds are able to time the market according
to return timing. Moreover, the evidence suggests that funds are able to time volatility
worse than market returns. What it means is that fund managers tend to time the market
return than volatility. The trend becomes reverse when we use daily data. Market timing
abilities are about 15% if we consider monthly data. Moreover, the evidence suggests that
funds are able to time volatility better than market returns. What it means is that fund
managers tend to time the volatility than market return.

This methodology can be repeated by clustering the mutual funds in the other specific
categories. We can also find whether size of the fund has some effect on the market timing
abilities. Bootstrap analysis can be carried out to see that the timing is not because of the
random chance. Further, rolling regressions can be done to see timing skill persistence.

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 9. Reference

1. Li Yia, Zilan Liua, Lei Hea, Zilong Qinb, Shunli Gana; Do Chinese mutual funds time
the market? Pacific-Basin Finance Journal 47 (2018) 1–19
2. Treynor, J.L., Mazuy, K.K., 1966. Can mutual funds outguess the market? Harv. Bus.
Rev. 44, 131–136.
3. Henriksson, R.D., Merton, R.C., 1981. On market timing and investment performance
II: statistical procedures for evaluating forecasting skills. J. Bus. 54, 513–533.
4. Busse, J.A., 1999. Volatility timing in mutual funds: evidence from daily returns. Rev.
Financ. Stud. 12, 1009–1041.
5. Agarwalla, S. K., Jacob, J. and Varma, J. R. (2013), Four factor model in Indian
equities market, Working Paper W.P. No. 2013-09-05, Indian Institute of
Management, Ahmedabad.
6. http://www-2.rotman.utoronto.ca/~hull/ofod/GarchExample/index.html

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