our results indicate the day-of- the-week effect for full sample

period, sub- periods and for some individual years. However, the pattern is
different from the one observed in most other developed markets. Instead of
negative returns on Mondays or even Tuesdays, we have negative returns on
Thursdays14 (significant), for full sample period and post-1999 sub period while
for
pre-1999 we observe negative return for Monday, as similar to international market
(when Sunday is the first trading day) but again the significant positive return
observed for Sunday is inconsistent to that observed for other markets.

In other words, investors can take advantage of information about the day-of
theweek
when investing in the NEPSE22. However, this may be due to market
imperfections and thus is not necessarily embarrassing for market efficiency.
Therefore, further research should be undertaken not only to conform the results of
the present study but also to examine the microstructure and operational procedure
of the Nepalese Stock Exchange. In addition, it is necessary to investigate whether
the reported anomalies are valid for individual shares or not23.

First, calendar effects could be a result of data mining. Even if there are no
calendar specific anomalies, an extensive search (mining)8 over a large number of
possible calendar effects is likely to yield something that appears to be an
anomaly by pure chance. Moreover, Merton (1987) points out that economists
place a premium on the discovery of puzzles, which in the context at hand amounts
to finding apparent rejections of a widely accepted theory of stock market

behavior (cited by Sullivan, Timmerman & White,1998). Another observation that

points to data mining as a plausible explanation is that theoretical explanations
have only been suggested after the empirical discovery of the anomalies.
The second is the data-snooping phenomenon9, an attempt to detect regularities
by many academicians and investors focusing on common stock price indexes
(more severe for US markets). Data snooping imparts a bias in the sense that it
affects inferences in an undesirable way (Lo & MacKinlay, 1990
Thus, the findings of systematic seasonal patterns in stock returns leave us with
a conundrum: do the apparent regularities in stock returns really imply a rejection
of simple notions of market efficiency, or are they just a result of a large, collective
data-snooping exercise? Many researchers express awareness of this problem.
Lakonishok and Smidt (1988), for example, comment on the seasonal regularities
in this way: However, it is at least possible that these new facts are really
chimeras, the product of sampling error and data mining. Grouped by calendar
frequency, the researchers have reported the following anomalies

Reason for bias

Sample size
Increasing sample size benefits a research study by increasing the confidence and
reliability of the confidence interval, and as a result, the precision with which the
population parameter can be estimated. Other choices affect how wide or how
narrow a confidence interval will be: choice of statistic, with t being wider/more
conservative than z, as well as degree of confidence, with lesser degrees such as
90% resulting in wider/more conservative intervals than 99%. An increase in

sample size tends to have an even more meaningful effect, due to the formula for
standard error (i.e. the ratio of 'sample standard deviation / sample size1/2'),
resulting in the fact that standard error varies inversely with sample size. As a
result, more observations in the sample (all other factors equal) improve the quality
of a research study.
At the same time, two other factors tend to make larger sample sizes less desirable.
The first consideration, which primarily affects time-series data, is that population
parameters have a tendency to change over time. For example, if we are studying a
mutual fund and using five years of quarterly returns in our analysis (i.e. sample
size of 20, 5 years x 4 quarters a year). The resulting confidence interval appears
too wide so in an effort to increase precision, we use 20 years of data (80
observations). However, when we reach back into the 1980s to study this fund, it
had a different fund manager, plus it was buying more small-cap value companies,
whereas today it is a blend of growth and value, with mid to large market caps. In
addition, the factors affecting today's stock market (and mutual fund returns) are
much different compared to back in the 1980s. In short, the population parameters
have changed over time, and data from 20 years ago shouldn't be mixed with data
from the most recent five years.
The other consideration is that increasing sample size can involve additional
expenses. Take the example of researching hiring plans at S&P 500 firms (crosssectional research). A sample size of 25 was suggested, which would involve
contacting the human resources department of 25 firms. By increasing the sample
size to 100, or 200 or higher, we do achieve stronger precision in making our
conclusions, but at what cost? In many cross-sectional studies, particularly in the
real world, where each sample takes time and costs money, it's sufficient to leave

sample size at a certain lower level, as the additional precision isn't worth the
additional cost.
Data Mining Bias
Data mining is the practice of searching through historical data in an effort to find
significant patterns, with which researchers can build a model and make
conclusions on how this population will behave in the future. For example, the socalled January effect, where stock market returns tend to be stronger in the month
of January, is a product of data mining: monthly returns on indexes going back 50
to 70 years were sorted and compared against one another, and the patterns for the
month of January were noted. Another well-known conclusion from data mining is
the 'Dogs of the Dow' strategy: each January, among the 30 companies in the Dow
industrials, buy the 10 with the highest dividend yields. Such a strategy
outperforms the market over the long run.
Bookshelves are filled with hundreds of such models that "guarantee" a winning
investment strategy. Of course, to borrow a common industry phrase, "past
performance does not guarantee future results". Data-mining bias refers to the
errors that result from relying too heavily on data-mining practices. In other words,
while some patterns discovered in data mining are potentially useful, many others
might just be coincidental and are not likely to be repeated in the future particularly in an "efficient" market. For example, we may not be able to continue
to profit from the January effect going forward, given that this phenomenon is so
widely recognized. As a result, stocks are bid for higher in November and
December by market participants anticipating the January effect, so that by the
start of January, the effect is priced into stocks and one can no longer take
advantage of the model. Intergenerational data mining refers to the continued use

of information already put forth in prior financial research as a guide for testing the
same patterns and overstating the same conclusions.
Distinguishing between valid models and valid conclusions, and those ideas that
are purely coincidental and the product of data mining, presents a significant
challenge as data mining is often not easy to discover. A good start to investigate
for its presence is to conduct an out-of-sample test - in other words, researching
whether the model actually works for periods that do not overlap the time frame of
the study. A valid model should continue to be statistically significant even when
out-of-model tests are conducted. For research that is the product of data mining, a
test outside of the model's time frame can often reveal its true nature. Other
warning signs involve the number of patterns or variables examined in the research
- that is, did this study simply search enough variables until something (anything)
was finally discovered? Most academic research won't disclose the number of
variables or patterns tested in the study, but oftentimes there are verbal hints that
can reveal the presence of excessive data mining.
Above all, it helps when there is an economic rationale to explain why a pattern
exists, as opposed to simply pointing out that a pattern is there. For example, years
ago a research study discovered that the market tended to have positive returns in
years that the NFC wins the Super Bowl, yet it would perform relatively poorly
when the AFC representative triumphs. However, there's no economic rationale for
explaining why this pattern exists - do people spend more, or companies build
more, or investors invest more, based on the winner of a football game? Yet the
story is out there every Super Bowl week. Patterns discovered as a result of data
mining may make for interesting reading, but in the process of making decisions,
care must be taken to ensure that mined patterns not be blindly overused.

Sample Selection Bias

Many additional biases can adversely affect the quality and the usefulness of
financial research. Sample-selection bias refers to the tendency to exclude a certain
part of a population simply because the data is not available. As a result, we cannot
state that the sample we've drawn is completely random - it is random only within
the subset on which historic data could be obtained.
Survivorship Bias
A common form of sample-selection bias in financial databases is survivorship
bias, or the tendency for financial and accounting databases to exclude information
on companies, mutual funds, etc. that are no longer in existence. As a result, certain
conclusions can be made that may in fact be overstated were one to remove this
bias and include all members of the population. For example, many studies have
pointed out the tendency of companies with low price-to-book-value ratios to
outperform those firms with higher P/BVs. However, these studies most likely
aren't going to include those firms that have failed; thus data is not available and
there is sample-selection bias. In the case of low and high P/BV, it stands to reason
that companies in the midst of declining and failing will probably be relatively low
on the P/BV scale yet, based on the research, we would be guided to buy these very
same firms due to the historical pattern. It's likely that the gap between returns on
low-priced (value) stocks and high-priced (growth) stocks has been systematically
overestimated as a result of survivorship bias. Indeed, the investment industry has
developed a number of growth and value indexes. However, in terms of defining
for certain which strategy (growth or value) is superior, the actual evidence is
mixed.

Sample selection bias extends to newer asset classes such as hedge funds, a
heterogeneous group that is somewhat more removed from regulation, and where
public disclosure of performance is much more discretionary compared to that of
mutual funds or registered advisors of separately managed accounts. One suspects
that hedge funds will disclose only the data that makes the fund look good (selfselection bias), compared to a more developed industry of mutual funds where the
underperformers are still bound by certain disclosure requirements.
Look-Ahead Bias
Research is guilty of look-ahead bias if is makes use of information that was not
actually available on a particular day, yet the researchers assume it was. Let's
returning to the example of buying low price-to-book-value companies; the
research may assume that we buy our low P/BV portfolio on Jan 1 of a given year,
and then (compared to a high P/BV portfolio) hold it throughout the year.
Unfortunately, while a firm's current stock price is immediately available, the book
value of the firm is generally not available until months after the start of the year,
when the firm files its official 10-K. To overcome this bias, one could construct
P/BV ratios using current price divided by the previous year's book value, or (as is
done by Russell's indexes) wait until midyear to rebalance after data is reported.
Time-Period Bias
This type of bias refers to an investment study that may appear to work over a
specific time frame but may not last in future time periods. For example, any
research done in 1999 or 2000 that covered a trailing five-year period may have
touted the outperformance of high-risk growth strategies, while pointing to the
mediocre results of more conservative approaches. When these same studies are
conducted today for a trailing 10-year period, the conclusions might be quite

different. Certain anomalies can persist for a period of several quarters or even
years, but research should ideally be tested in a number of different business cycles
and market environments in order to ensure that the conclusions aren't specific to
one unique period or environment.

Read more: Sampling Considerations - CFA Level 1 |

Investopedia http://www.investopedia.com/exam-guide/cfa-level-1/quantitativemethods/sampling-bias.asp#ixzz4ILCjmRAX
Follow us: Investopedia on Facebook

Mutual Fund is a fund created by pooling the savings of a number of investors

who share a common financial goal (growth, income, risk diversification, others). The term Mutual
implies that fund belongs to all the investors. The general benefits offered by mutual fund over stock
investment by individual are the ease of diversification, expert handling of the investment decisions,
collective bargaining power, lower transaction costs and high liquidity among others.
Growth funds are aimed to provide capital appreciation over the medium to long- term. Such
schemes normally invest a major part of their corpus in equities and thus have comparatively high
risks. The income funds aim to provide regular and steady income to investors. Such schemes
generally invest in fixed income securities such as bonds, corporate debentures, government
securities, dividend paying securities and money market instruments. These are less risky as
compared to the growth funds but also have relatively lower expected returns. The aim of balanced
funds is to provide both growth and regular income.
In the context of Nepal, the history of MF started with the floatation of NCM Mutual Fund, 2050 an
open ended fund with an amount of 100 million and managed by NIDC Capital Markets Ltd.
SEBON set provisions to make the issue prospectus more transparent. It also prescribed for
inclusion and acceptance of investor friendly provisions, which included the autonomy of the fund,
the fund manager and the custodian with their clearly defined roles and transparency in the valuation
of assets. Besides it mandated that fund should bring earnings cum growth schemes (not growth
scheme alone) and that sponsor should bring in at least 15% corpus to the fund. However, clear
mandate to regulate such a fund was not available to the SEBON and existing legal frameworks too
were not sufficient.

But, after two years of operation, the NCM Mutual Fund could not cope with the liquidity pressure
generated by the fund holders and, NRB and Nepal Industrial Development Corporation had to help
it out. Citizen Unit Scheme, 2052 and NCM Mutual Fund, 2059 followed. The latter scheme, upon
maturity was not able to repay unit holders on time.
SEBON observed the necessity of drafting an Investment Trust Act to enable the establishment and
operation of trust funds and thus the Securities Investment Trust Act of 1997 was enacted.
Currently, two most active mutual funds schemes in the market are: Siddhartha Investment Growth
Scheme I (SIGS-I) and Nabil Balanced Scheme I (NBS-I). SIGS-I is a growth scheme, thus
exhibits higher volatility and higher expected returns. And NBS-I is expected to exhibit relatively
lower volatility and lower expected returns.
These funds invest in stocks, bonds and money market instruments. For stocks, the funds have to
rely on the Nepalis stock market and the initial public offerings.
The Nepalis stock market is characterized by low liquidity, high concentration and volatility. The
investors too are not knowledgeable and trade infrequently- further hampering the liquidity. The
investors demonstrate herd mentality, and trade on noise rather than on fundamentals. The capital
market is concentrated in BFIs and insurance companies. Only few hydropower companies, a
telecom provider and few manufacturing companies offer some sort of diversification.

Technology is also seen as a major issue. Transactions take long time to materialize. Technology to
calculate real time NAVs is missing. Conflict of interest is persistent within the fund, between the
schemes, and with the funds and the banks that sponsor them. If a fund operates multiple schemes
(there is a rumour that Sidhhartha Capital is trying for this), then how will the costs of transactions be
allocated across the schemes?
For example, if ABC Mutual fund is operating three schemes growth, balanced and income and
suppose all the schemes have to buy shares of Sanima Bank. If the combined requirement is for
1000 shares, then during the purchase, the cost for the first share and the thousandth share maynt
be the same. Then, in such cases, how will the fund allocate the cost across the schemes? How will

the managers be remunerated if they are involved in management of all the schemes? Wouldnt they
be induced to overwork on schemes that provide better incentives, thereby hampering the
performance of other schemes?
Also, investors can hardly get neutral advices regarding the funds from the sponsor banks. Suppose
a person has fixed deposit at Nabil Bank. Upon maturity, if the depositor asks the bank for suitable
investment prospects, would the bank official discuss the advantages of both SIGS-I and NBS-I or
only of the latter?
A lot of increase in NAV of the mutual fund schemes currently in action, particularly that of SIGS-I
can be attributed to the prescribed allocation in IPOs. A set portion of IPOs is distributed among the
mutual funds, thereby enabling the funds to post high increase in scheme NAVs. How will these
schemes deliver in periods of no IPO offering is yet to be seen.
We tried to study the performance of Indian Mutual Funds since 1962. We studied this to identify
problems faced by them in the past and the present, and their prescribed solutions. This would help
better predict the future of Nepalis Mutual Fund industry and thus help us prepare for it. Assessing
the Indian MF industry, diversification, investor literacy, penetration to rural areas and smaller towns,
conflict of interest, ambiguity of law, lengthy procedures and lack of customer focus on products were
seen as past and prevalent problems. Although different segments of the industry were working on
resolution, the problems did form the bottleneck in the rapid growth of the industry.
Similar problems, apart from the existing ones, are expected in Nepal over the next decade. Liquidity,
volatility, transparency, investor literacy and system related problems will take time and immense
effort to be resolved. All the parties involved in the industry have to play active role in resolving these
issues in order to help the industry grow. Solutions could be home grown or inspired by the global
best practices fitting the Nepalis market.
Apart from these problems, the concentration of Nepalis stock market in banking, financial
institutions and insurance company stocks make it harder for mutual funds to generate a finely
diversified fund.
Resolving these issues would ensure bright future of mutual fund industry in Nepal, at least for the
next decade until Exchange Traded Funds (ETFs) replace them.