Financial Performance of Equity Mutual Funds: Empirical Evidences from India

Abstract

Mutual funds are popular vehicle to manage surplus funds in the hands of public so as to bring them the benefits of capital market in terms of earning expected rates of return on their investments. History of mutual funds management in India is rather new, vis-à-vis, mutual funds in U.S.A. or U.K. Yet the mutual fund industry in India has caught up the attention of millions of investors with diverse interest revolving around three basic principles of investments viz. safety, liquidity and returns. This paper examines the rates of returns generated by equity mutual funds, vis-à-vis, 364 days T-bills during 1993-2002. Rates of Return of 364 days T-bill is surrogate measure for risk-free return in our analysis. While investment in risk-free assets are expected to provide high safety of capital and low returns, investment in equities are expected to provide high returns as the capital is exposed to risk of erosion. Hence, risk premium is implied expectation of the investors. The term 'Risk Premium' is associated with risky investments and may be defined as the rate of return earned by the investment in excess of risk-free rate of return. The sample of thirty-six equity mutual funds has been drawn from twenty-one asset management companies belonging to private and public sectors. The sample is true representative of the Universe, as it constitutes more than two-thirds of the total equity mutual funds operating in India.