Risk in the shadows: Macroeconomic shifts and their effects on Bangladeshi mutual funds

This study examines the downside risk, measured by semi-standard deviation and lower partial moment, and downside risk-adjusted return, measured by the Sortino ratio and Information ratio of Bangladeshi mutual funds. The study aims to explore the effect of macroeconomic variables such as deposit rate, broad money supply, GDP growth rate, remittance, exports and imports payments on downside risk and risk-adjusted returns. Month-wise downside risk and risk-adjusted return measures of 27 mutual funds are computed using the 12-month rolling window method, covering the period from January 2016 to December 2023. Here, the random effects model is utilized, and the results show that semi-standard deviation has a significant and positive relationship with deposit rate, broad money, and GDP growth rate and a negative relationship with export and remittance. Another downside risk measure, lower partial moment, is significantly and positively related to export and remittance but negatively related to deposit rate, broad money, and GDP growth. On the other hand, the risk-adjusted return Sortino ratio has a significant and positive relationship with the deposit rate, remittance, and GDP growth rate but also has a negative relationship with exports. Furthermore, the information ratio has a significant and positive relation with deposit rate, import and remittance, and a negative relation with GDP growth rate. Overall findings suggest that when broad macroeconomic factors performed well, mutual funds face reduced downside risk and increased risk-adjusted return, and vice versa. Practitioners and institutional investors can use this evidence in their decision-making in an asymmetric market situation.