THE LIMITS OF ACTIVE MANAGEMENT: EVIDENCE FROM INDIAN EQUITY MUTUAL FUNDS

This study examines the performance of active mutual funds in comparison to their benchmark indices. Three categories of equity mutual funds were considered and evaluated separately in this study: large-cap, mid-cap, and small-cap. The evaluation was performed on excess returns, risk, volatility, and consistency-adjusted metrics. All active mutual funds available in the Indian stock market in the last five years were considered and investigated using a cross sectional benchmark analysis, multiple linear regression, and logistic regression models. The results indicate high market efficiency in the large-cap sector, causing the alpha to be beta-driven, with diminishing efficiency in the mid-cap and small-cap sectors. The influence of managerial skill is also the lowest in the large cap sector, with an increasing trend in the lower market capitalization categories.All categories exhibit underperformance on risk-adjusted and consistency metrics, with mid cap funds greatly underperforming on non adjusted excess returns also. Small-cap funds were found to have considerable capacity for managerial skill, but were suppressed by inefficient risk utilisation. Overall, the findings highlight that risk utilisation is essential for generating excess returns, and the potential for managerial skill decreases with market capitalisation.