Reassessing Mutual Fund Performance with Data Envelopment Analysis: A Comprehensive Approach

Abstract

Mutual funds play a significant role in the financial market by offering investors a diversified and professionally managed investment avenue. Evaluating their performance is essential for investors, fund managers, and policymakers to make informed financial decisions. Traditional performance evaluation methods, such as Sharpe Ratio, Treynor Ratio, and Jensen’s Alpha, provide insights based on risk-return metrics but often fail to consider multiple influencing factors simultaneously. To overcome this limitation, this study employs Data Envelopment Analysis (DEA), a non-parametric mathematical approach, to assess the relative efficiency of mutual funds based on multiple inputs and outputs. DEA is widely used in efficiency analysis as it enables a comparative evaluation without assuming a predefined functional form. In this study, mutual funds are analysed using DEA with key performance indicators such as assets under management (AUM), expense ratio, risk measures, and return-based metrics. By treating mutual funds as Decision-Making Units (DMUs), DEA identifies the most efficient funds that maximize returns given their level of input resources. Inefficient funds are also identified, providing fund managers with insights into areas where improvements can be made. The study’s findings contribute to the growing field of financial efficiency analysis by highlighting the role of multi-dimensional evaluation in mutual fund selection. The results reveal that some funds consistently operate at optimal efficiency levels, while others exhibit inefficiencies due to excessive costs, poor risk management, or suboptimal asset allocation strategies. The study provides a valuable decision-support tool for investors seeking to optimize their portfolio choices and for mutual fund companies aiming to enhance operational effectiveness. By employing DEA, this research moves beyond traditional performance metrics and provides a holistic assessment of mutual fund efficiency. The approach offers a more comprehensive and data-driven methodology for evaluating funds in a competitive financial market. The study's findings have practical implications for investors, portfolio managers, and regulatory bodies, reinforcing the need for an efficiency-based approach to mutual fund performance evaluation.