Version 1
: Received: 20 May 2024 / Approved: 21 May 2024 / Online: 21 May 2024 (05:09:51 CEST)
How to cite:
Krishnamurthy, J.; Singh, S. P. Does Diversification in Overseas Equity by Indian Mutual Funds Improve Their Performance?. Preprints2024, 2024051345. https://doi.org/10.20944/preprints202405.1345.v1
Krishnamurthy, J.; Singh, S. P. Does Diversification in Overseas Equity by Indian Mutual Funds Improve Their Performance?. Preprints 2024, 2024051345. https://doi.org/10.20944/preprints202405.1345.v1
Krishnamurthy, J.; Singh, S. P. Does Diversification in Overseas Equity by Indian Mutual Funds Improve Their Performance?. Preprints2024, 2024051345. https://doi.org/10.20944/preprints202405.1345.v1
APA Style
Krishnamurthy, J., & Singh, S. P. (2024). Does Diversification in Overseas Equity by Indian Mutual Funds Improve Their Performance?. Preprints. https://doi.org/10.20944/preprints202405.1345.v1
Chicago/Turabian Style
Krishnamurthy, J. and Satyendra Pratap Singh. 2024 "Does Diversification in Overseas Equity by Indian Mutual Funds Improve Their Performance?" Preprints. https://doi.org/10.20944/preprints202405.1345.v1
Abstract
As per the portfolio theory proposed by Markowitz (1952), diversification has the potential to mitigate portfolio risk. Further benefits can come from diversifying internationally since poor correlations among international markets can cause risks that are systematic in one market to become unsystematic in terms of the global economy. SEBI granted approval for Indian Mutual Funds to invest in ADR/GDR released by Indian Companies in 1999. Subsequently, SEBI has eased the rules for investment and several times it has now allowed Indian mutual funds to invest in foreign equity subject to certain limits. While SEBI had approved Indian mutual funds to invest in ADSs of Indian companies way back in 1999, the growth in investment in foreign securities started with the outbreak of COVID-19 in 2020. The exponential growth in the value of stocks in the US, driven largely by growth in technology stocks, propelled investment by Indian Mutual Funds that increased investment by ten-fold to over INR 30,000 Crores. While several focused funds with a mandate to invest in US stocks formed the bulk of the investment, other flexi cap and blue-chip funds, which had erstwhile fully invested in Indian stocks, also joined the bandwagon. While research on other developed economies has revealed the positive impact of international diversification, the Authors current research examined the advantages of international diversification on the Indian mutual funds’ performance. Authors used methods like t-test, F-test, Anova, Levene test for homogeneity and regression to check the validity of our results. Authors found that the international diversification by Indian equity mutual funds that invest in both US and Indian equities outperform benchmarks one third of the time. More importantly, by diversifying into international equities, these mutual funds are able to lower their volatility and therefore provide better risk reward returns. This is the first major study of this kind about Indian mutual funds investment in foreign equities and would be valuable investors, mutual fund managers and the regulator. As investments by Indians and Indian equity mutual funds are expected to increase significantly in the coming years, this study is timely and relevant at the current context of Indian mutual fund industry.
Keywords
foreign equity; international diversification; mutual fund
Subject
Business, Economics and Management, Finance
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
