Forecasting Fund Flows in Indian Equity Mutual Funds Market using Time Series Analysis: An Empirical Investigation

Abstract

Mutual Funds are the second most preferred financial investment option in India amongst households, corporate and private investors alike. Managed funds bring with them the expertise of fund managers along with the benefits of diversification and lower costs. The sensitivity of fund flows defines the ability of the fund manager in offering expected future returns. Mutual fund flows exhibit time series characteristics, it being financial data collected at regular intervals over a time period. This paper studies the dynamics of mutual fund flows by utilising time series regression modelling. Monthly fund flows data for a sample of 142 equity open-ended growth orientation across major marketcap categories – Large Cap, Large and Mid Cap, Multi Cap, Mid Cap, and Small Cap have been analysed using ARIMA Modelling in the R software package. Appropriate lag length and the presence of a unit root have been investigated with the help of established techniques coupled with suitable checks of robustness. Model of best fit has been used to forecast monthly fund flows for a lag length of 60. Our study leads us to two major outcomes. One, unlike many developed and emerging markets, fund flows in the chosen sample do not confirm to positive feedback trading hypothesis. This lends credible support to the absence of irrational exuberance in mutual fund investments. Second, equity-based funds in Large Cap, Large and Mid Cap, and Multi Cap category exhibit strong trend component while funds in Mid Cap and Small Cap category have a strong random component. Beginner investors can take advantage of alpha offered by fund managers possessing effective market -timing skills, an indicator of trend-investing strategy. Funds belonging to these categories are also lesser prone to market volatility in comparison to Mid Cap and Small Cap funds, being more suitable for experienced investors