Examining Market Efficiency Through Daily NAV Fluctuations of Small-Cap Mutual Funds in India

Abstract

This study examines the weak-form efficiency of the Indian mutual fund market by analyzing the daily Net Asset Value (NAV) fluctuations of selected small-cap mutual funds from 2019 to 2025. Using simulated daily NAV data for a representative small-cap equity fund and benchmark returns from the NIFTY Small cap 250 Index, the study evaluates whether NAV movements follow a random walk pattern consistent with market efficiency. Four econometric tests are applied: the Runs Test to assess randomness, the Ljung –Box Q-test to detect serial correlation, the Augmented Dickey–Fuller (ADF) test for unit roots, and the GARCH (1, 1) model to identify volatility clustering. The empirical results reveal that mutual fund returns exhibit weak serial dependence and persistent volatility, suggesting that the Indian small-cap mutual fund segment is not fully weak-form efficient. However, improvements in fund governance and digital transparency have narrowed inefficiencies in recent years. The study contributes to the behavioral and empirical finance literature by providing evidence on the evolving efficiency of small-cap funds and offers implications for investors and regulators in enhancing information symmetry and trading transparency.