The Effect Of Fund Characteristics On The Returns Of Mutual Funds In Kenya

Abstract

This study aimed at establishing the effect of fund characteristics on returns of Mutual funds in Kenya. It sought to fill the existing research gap in the evaluation and analysis of risk adjusted returns of mutual funds in relation to various fund attributes, in this case fund age, fund size and transaction costs. In order to address this gap, a hypothesis was formulated and tested on a population of nineteen mutual funds licensed by CMA and which had complete set of data for the period 2010 to 2014. Regression analysis was then used to test the hypothesis. The Sharpe ratio, which is a risk/return measure, was computed for each of the funds using an annualised 91-day T-bill rate and the portfolio rate of return. The Fund size was obtained by computing the natural log of the fund’s total assets, fund age was measured by the number of years the fund was in existence while the transaction costs were measured by the average annual management fees. The findings of this study showed that there is a statistically significant relationship between fund size, fund age and transaction costs and mutual fund returns. The relationship between fund size and fund age with mutual funds returns was negative while that with transaction costs was positive. The regression coefficients of these independent variables were small implying that the effect of these characteristics on the overall returns is minimal as compared to other factors. Based on the results from the regression, the null hypothesis that fund characteristics and mutual fund returns are unrelated was rejected. The results of this study add to the existing knowledge on the determinants of mutual fund returns. Since the findings indicate a relationship between fund variables and returns, Fund Regulators can justify the need to evaluate and set limits on existing and new funds, in terms of age, size and also manage transaction costs charged, in a bid to ensure that investors are attaining maximum returns for their investment. The study also recommends that investors in mutual funds also consider fund attributable characteristics, in addition to risk, while making the choice on which mutual fund to invest in.