Performance Evaluation of Indian Mutual Funds using Data Envelopment Analysis

The purpose of this paper is to evaluate the performance of Indian mutual funds using the data envelopment analysis (DEA) technique. Mutual funds can be broadly classified into three categories, i.e., equity based, equity ELSS based and balanced and debt based. For our purpose, we have chosen fifteen mutual funds from three such sub-categories, i.e., equity based, equity ELSS based and balanced or hybrid, which are having track record of above five years. Monthly returns of these mutual funds are collected from secondary sources. Maximising return with minimisation of risk is kept as the basic objective functions in this analysis. In the input side of this analysis, we have kept three types of risks [std. deviation, beta and average expense ratio (ER)]. The outcome of this analysis shows how different parameters influence the risk and return in the case of mutual funds. DEA is particularly useful in multi-criteria methodologies where the sample size is quite large. This paper is a different attempt to evaluate the performance of mutual funds through an interesting alternative method to understand the performance pattern and other dimensions which will help in valuation of these financial instruments. It also provides a mean for evaluating asset management practices in India. The outcome of this research will be helpful in improving the regulation of mutual funds for regulators, evaluating the investment alternatives and designing the compensation structure for portfolio managers.