Performance of aggregate portfolios of equity mutual funds: Skill or luck?

Abstract

Mutual funds have become an important means for individual investors to invest in the equity market. They allow investors to buy into a growing stock market as well as diversify their risk. The U.S. Securities and Exchange Commission defines a mutual fund as "a type of investment company that pools money from many investors and invests the money in stocks, bonds, money-market instruments, other securities, or even cash." Assets under management by mutual funds total $30 trillion globally, or about 40 % of world’s GDP. In developed markets like the United States, assets under management account for approximately 89 % of GDP. By contrast emerging markets like India remain highly under penetrated. The chapter will first present some descriptive statistics contrasting the two countries. It will then evaluate the performance of mutual funds in an emerging market such as India, borrowing a methodology extensively used in asset pricing literature (Fama and French, J Finance 318 Econ 33(1):3-56, 2010). Using bootstrap simulations, we will analyze the persistence of fund returns which will be used in distinguishing skill from luck. © Springer India 2016.