An Evaluation of Mutual Fund Performance in an Emerging Economy: Evidence from Bangladesh

Abstract

This study evaluates the relative performance of mutual funds listed on the Dhaka Stock Exchange (DSE) over a ten-year period, from July 2014 to June 2024. Utilizing secondary data, the research examines 21 actively traded closed-end mutual funds, focusing on their risk-adjusted performance metrics. Key measures, including the Sharpe ratio, Treynor ratio, Jensen's Alpha, and Fama’s decomposition model, are employed to assess fund effectiveness relative to market benchmarks, specifically the DSEX index. Findings indicate that a significant portion of the mutual funds underperformed based on annualized return on the benchmark, with only a few demonstrating superior risk-adjusted returns. Most funds exhibited a moderate relationship (R² ranging from 20%-40%), suggesting that their returns were not heavily dependent on systematic risk (βp). This indicates that managers were assuming a certain level of diversifiable (unsystematic) risk. The analysis further reveals that fund managers' selectivity and diversification strategies play critical roles in value creation. All funds exhibited negative values, indicating a deficiency in selectivity among fund managers. It also comes to the conclusion that, in terms of risk and return model performance, mutual funds in Bangladesh have a stronger overall position than the benchmark index during the course of the study period. The findings of this study will be useful for all kinds of investors, policy makers, corporations and financial market participants. Therefore, this study aspires to offer practical utility by serving as a reference point for prospective investors, furnishing valuable insights to aid in informed decision-making within the dynamic landscape of the stock market.

Keywords: Mutual Fund, Risk-Return Analysis, Unsystematic Risk, Systematic Risk, CAPM, Sharpe ratio, Treynor ratio, Jensen ratio, R-squared, Fama Decomposition Model.