Exploring the Herding Behaviour in Indian Mutual Fund Industry

Abstract

The present study analyzes the trading activity of Indian mutual funds and investigates whether Indian mutual fund managers are engaged in herding behaviour. Results are compared with previous studies in mature as well as developing markets to determine the level of maturity of the Indian capital market. Measure of herding developed by Lakonishok et al. (1992) has been used. The study found strong evidence of herding in the overall sample. Managers herd primarily when they trade in large capitalization stocks or stocks that belong to the most famous indices. The herding effect seems to affect both purchases and sales of stocks. The level of herding is more in Indian stock market as compared to developed markets. Furthermore, the Indian mutual funds tend to herd more often when purchasing than when selling a stock, and when trading large stocks. The study will contribute to the discussion regarding market efficiency and traditional asset pricing models validity. Evidence on herding by institutional investors, could explain whether there are different types of investors having different trading pattern. Investigating herding on Indian mutual funds would help researchers, investors, traders and regulators.