The Indian Mutual Fund Industry has been growing at a robust pace with increasing number of global fund managers operating in Indian markets with new products and services. The volatility in stock markets and financial crisis of 2008 had resulted in a steep fall in returns as well as AUMs managed by the equity funds. Some of the portfolios suffered huge losses and adversely impacted investor confidence of investing in equity funds even when the markets are at low. Some of the reasons could be the stickiness in portfolios and inability to predict and hedge macro risks led to their inability to churn portfolios swiftly resulting in less than returns compared to benchmark returns. This brings forth the importance of quality research to help model the macroeconomic risks associated with this mutual fund industry.
With the Bull Run in the Indian capital markets, the assets under management (AUM) has quadrupled from the level of Rs 1,31,000 crore in early 2003 to a little over Rs12 trillion in FY15. The increased openness of the economy to global markets brings in more uncertainties in terms of both internal risks and policy impacts on the markets and participants of capital markets. The unprecedented volatility is to be tackled by the fund manager by using tools that help him to assess and measure the macroeconomic risks. Current market returns benchmarks of BSE and NSE are typically used for all equity mutual funds. The portfolio composition of these funds needs to be correctly mapped with the benchmarks to be used in estimating the performance of the funds. The inability of these benchmarks to capture macro risks makes it difficult to attribute the fund performance to the various macro risks.
This paper made an attempt to create alternate benchmarks that capture macro risks and quantified the equity fund performances.