Higher Order Moments Based Models to Evaluate the Performance of Mutual Funds: Indian Evidence.

In this study, we evaluate the performance of mutual funds in India using higher order moments based asset pricing models. Using a sample of 48 open-ended equity schemes with growth as their objective, we employ two-moment, three-moment and four-moment asset pricing models over the period April 2007 to March 2011. Following Fama and Macbeth (1973) cross-sectional regression approach, the results show that covariance and cokurtosis are not priced in the Indian market, whereas coskewness is statistically significant in the higher order moments framework. Based on adjusted R2, three-moment asset pricing model is found to be the most superior performance measure among the three models in explaining mutual fund performance in India. Employing three-moment model, seven schemes are characterized by statistically significant negative alphas and three schemes exhibit statistically significant positive alphas. It is suggested that the higher order moments based asset pricing models should be employed as coskewness plays an important role in explaining the performance of mutual funds. The findings are relevant for mutual funds investors, fund managers and academic community. The study contributes to the literature of performance evaluation of mutual funds. [ABSTRACT FROM AUTHOR]