Do Indian business group owned mutual funds maximize value for their investors?
Description
The manager of a business group (BG) mutual fund in India may have access to private information about affiliated firms and their industries. However, because the fund is part of a business group, the manager may also face incentives to make investment decisions that benefit group firms rather than fund investors. In this paper, we examine the relationship between a BG mutual fund’s return performance and its ownership holdings in (i) affiliated BG firms, and (ii) rival firms operating in the same industries as those BG firms. Using a survivorship-bias-free sample of Indian BG mutual funds over the period 2002–2010, along with detailed data on returns and portfolio holdings, we analyze how these ownership positions affect fund performance. Our findings indicate that the relationship between a BG fund’s risk-adjusted returns and its investment in BG-affiliated firms or their industry rivals follows an inverted “V” pattern. Specifically, funds tend to underperform when they either increase or decrease their exposure to these firms beyond the level typically observed among comparable funds. The negative effect is particularly pronounced in cases of underinvestment. These results, especially in the context of investments in BG firms, suggest the presence of opportunistic behavior by fund managers, highlighting potential conflicts of interest within business group-affiliated mutual funds.
Copyright Date
January 2014
Publication Date
1-1-2014
Keywords
Business management, Indian business group, Mutual funds, Investors
Conference
Conference on Indian macroeconomic policy, 14th February, 2014, Indian Statistical Institute, New Delhi
