Do Indian Business Group Owned Mutual Funds Maximize Value for Their Investors?

39 Pages Posted: 29 May 2014

See all articles by Pulak Ghosh

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Jayant R. Kale

Northeastern University

Venkatesh Panchapagesan

Indian Institute of Management (IIMB), Bangalore

Date Written: May 29, 2014

Abstract

The manager of an Indian business group (BG) fund can have access to private information on its own BG firms and their industries. However, since the fund belongs to a BG, the fund manager may also have incentives to undertake investments that benefit the BG firm managers and not its fund investors. In this paper, we examine the relation between a business group (BG) mutual fund’s return performance and its ownership levels in (i) its own BG firms, and in (ii) the rivals of its BG firms that operate in the same industries. Using return and portfolio holdings data on a survivorship-bias free sample of Indian BG mutual funds for the period 2002-2010 we find that the relation between a BG fund’s risk-adjusted returns and its ownership in its own BG firms or firms in BG industries is roughly in the form of an inverted “V,” i.e., funds underperform whenever they increase or decrease their investment in group firms or rival firms beyond what a typical fund invests in these firms. The effect is stronger for underinvestment. This finding for BG firms suggests opportunistic behavior on the part of the BG fund manager.

Keywords: Indian Business Group, Mutual Funds, Investors

Suggested Citation

Ghosh, Pulak and Kale, Jayant Raghunath and Panchapagesan, Venkatesh, Do Indian Business Group Owned Mutual Funds Maximize Value for Their Investors? (May 29, 2014). IIM Bangalore Research Paper No. 463. Available at SSRN: https://ssrn.com/abstract=2443250 or http://dx.doi.org/10.2139/ssrn.2443250

Pulak Ghosh (Contact Author)

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Jayant Raghunath Kale

Northeastern University ( email )

Boston, MA 02115
United States

Venkatesh Panchapagesan

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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