Abstract
Predicting Out-of-Sample Returns of Mutual Funds: A Study by Inderjeet Kaur The literature on mutual funds has mainly focused on explaining performance of mutual funds with various performance measurement models. But from investors' perspective, it is important to predict the returns of mutual funds in future. In this paper, we test the efficacy of three investment strategies, that is, benchmark returns, loadings on risk factors and managerial performance to predict the out-of-sample returns of mutual funds. The loadings on risk factors and managerial performance have been obtained from four factor Carhart model. The out-of-sample predictions have been compared with Clark and West (2007) test.Utilizing the data of Indian equity mutual funds for the period 2006-2015, we have compared the out-of-sample return predictions for two investment horizon, that is, one year and three years based on three investment strategies. The results provide that benchmark returns is the most important source of predicting returns of mutual funds. Compared to benchmark returns and loadings on risk factors, so-called managerial performance of fund manager had least predictive capability. This further questions the importance of fund manager in Indian equity mutual fund industry. Our results indicate that active management does not add significant value and don't provide any valuable information to locate the outperforming mutual funds in two investment horizons, that is, one year and three years.