Investor Behaviour and The Persistence of Poorly Performing Mutual Funds: Evidence from India

Abstract

This paper examines how consistently under-performing mutual funds are able to persist nevertheless and also analyses whether the investors choose funds on the basis of past risk-adjusted returns or investors react to recent returns without considering the predictive validity of returns. The study is based on growth funds of all open ended equity schemes for a period of 10 years, i.e., from 1st April 2001 to 31st March 2011 and evaluates the performance of mutual funds based on 25 selected schemes. Capital Asset Pricing Model(CAPM) and models suggested by Sharpe, Treynor, and Jensen Measure were used. The study reveals that the investors are concentrating on the recent return and focusing on the future performance by ignoring the risk involved in it. The paper concludes that though the risk is high, the under-performing funds are able to survive nevertheless into the market.

Keywords: Behavioural Finance, Capital Asset Pricing Model, Growth Schemes, Investment Decision, Jensen’s Alpha, Performance Evaluation, Sharpe Ratio, Treynor Ratio

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