An Empirical study on Mutual fund factor-risk-shifting and its intensity on Indian Equity Mutual funds

TL;DR

This study investigates how Indian equity mutual funds shift investment styles and risk profiles over time, affecting their risk-adjusted returns and revealing patterns of style rotation and strategic adjustments.

Contribution

It provides empirical insights into style transitions, risk-shifting intensity, and their impact on fund performance in the Indian mutual fund industry.

Findings

Funds frequently shift styles, indicating active management and adaptation.

Style shifts can lead to improved risk-adjusted returns.

Certain styles like Small Value are associated with higher alpha generation.

Abstract

Investment style groups investment approaches to predict portfolio return variations. This study examines the relationship between investment style, style consistency, and risk-adjusted returns of Indian equity mutual funds. The methodology involves estimating size and style beta coefficients, identifying breakpoints, analysing investment styles, and assessing risk-shifting intensity. Funds transition across styles over time, reflecting rotation, drift, or strengthening trends. Many Mid Blend funds remain in the same category, while others shift to Large Blend or Mid Value, indicating value-oriented strategies or large-cap exposure. Some funds adopt high-return styles like Small Value and Small Blend, aiming for alpha through small-cap equities. Performance changes following risk structure shifts are analyzed by comparing pre- and post-shift metrics, showing that style adjustments can enhance returns based on market conditions. This study contributes to mutual fund evaluation literature by highlighting the impact of style transitions on returns.