MEASURING THE EFFICIENCY OF INDEX FUNDS: EVIDENCE FROM INDIA

Abstract

The purpose of this study is to analyse the technical efficiency of Index funds using data envelopment analysis (DEA) and to assess the reasons of inefficiency. Based on secondary data collected from the annual reports of the Association of Mutual Funds in India, this study examined the efficiency performance of the top Index funds available to Indian investors from the year 2018 to 2022 using radial measurers (BCC) of data envelopment analysis. The results show that the average efficiency of Index funds was 83.04 percent during the study period, and the average efficiency of index funds was almost stable during the study period. Only 10 percent of the index funds operated efficiently during the study period. The least amount of slack was found in the input "expense ratio". This reiterates that investment risk is the cause of the funds' inefficiency and not the associated expenses.  This study is first of its kind that has assessed the of Indian index funds and therefore holds important insights for regulators, policy makers and practitioners.