Selection ability, timing ability, and performance persistence of Indian fixed income mutual funds

Abstract

In this study, we evaluate performance of the Indian fixed income mutual funds using a comprehensive sample of funds over a period from April 2015 to March 2020. We examine selection ability, market timing ability and persistence of performance of 254 fixed income funds across 16 fund categories. Using monthly holding period returns for the fund and 22 different benchmarks, we assess (a) selection ability of funds using single- and multi-factor models; (b) timing ability of funds using Treynor-Mazuy model; and (c) performance persistence of funds using recursive portfolio formation test. Our findings indicate inferior securities selection ability, positive market timing ability for some intermediate duration and longer duration funds, and positive performance persistence for the top-decile and bottom-decile funds. Findings also indicate that credit spread has a stronger role than term spread in performance of Indian fixed income funds. This is possibly the first comprehensive study that examines the performance of Indian fixed income mutual funds and contributes to the growing body of research on performance evaluation of fixed income funds. In light of the prominence of fixed income securities, the findings of this study are all the more pertinent to investors, asset management companies and policy-makers.