Decoding Consistency: An Empirical Analysis of Mutual Fund Returns in Volatile Markets

Abstract

The problems of market volatility on the rise pose the mutual funds performance against its stable and predictable performance raising the fundamental question whether fund managers can deliver the predictable performance when no one can predict the future market performance. The paper analyses the degree of performance persistence of equity mutual funds during tumultuous market conditions and identifies the factors that increase or decrease the sources of performance. The discussion builds on a sample of actively managed mutual funds throughout the past 10 years to examine volatility clustering, rolling returns window, and risk-adjusted performance criteria to establish the trends that remain hidden with the help of conventional annualized analysis. The study employs Sharpe ratios, down side deviation measures, cross sectional regressions in determining whether performance in a volatile period is a good predictor of performance in turbulent periods to follow.

Results show that although a small portion of the funds can be shown to have a consistent performance over several periods of volatility, most of them tend to show varying returns in tandem with the market movements and not because of the ability of the manager. The consistency is observed more in funds that have disciplined investment mandates, less turnover in the portfolio, and well-structured risk management structures. On the other hand, the performance dispersion of funds with high-momentum or opportunistic strategies is high implying that they are sensitive to quick price changes and liquidity limitations. Another point of analysis which can be identified is that fund size and expense ratios have a quantifiably perceptible effect on the stability of returns, especially during the periods when markets undergo steep drawdowns.

In general, the results of the study conclude that consistency of mutual funds returns in volatile markets is quite rare and usually due to the structural features rather than to the tactical choices. These insights provide investors and policy-makers with a better sense of how they can assess the resilience of fund, such that they should not look at short-term outperformance but rather consider behavioural patterns in the long term when operating in uncertain market environments.