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Risk factors, uncertainty, and investment decision: evidence from mutual fund flows from India

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  • Elizabeth Nedumparambil

    (T A Pai Management Institute, Manipal Academy of Higher Education)

  • Anup Kumar Bhandari

    (Indian Institute of Technology Madras)

Abstract

Asset pricing theories provide an understanding of the risk factors that determine the price of assets. The identification of risk factors assists investors in seeking out profitable investment opportunities. The difficulty in observing how investors identify such opportunities and how they react to it has largely restricted the literature from determining the factors that matter to an investor. There is a paucity of empirical studies that give insight into the investment decision-making process of an investor. Some of the recent studies that seek to fill this gap have used mutual fund flows to infer which asset pricing model investors use. The fund flows are used as a measure of investors’ response for the identification of a positive net present value investment opportunity. These studies suggest that the Capital Asset Pricing Model (CAPM) is closest to the asset pricing model used by investors in the US market. Taking this literature forward, we enquire whether investors from Indian markets exhibit a similar pattern when making investment decisions. Using the fund flows to actively managed equity schemes, we have investigated the risk factors that matter for mutual fund investors in India for the period from April 2006 to December 2019. We use alternative performance measure and then evaluate the sensitivity of fund flows to each of the performance measures. Our results suggest that investors assess the performance of competing investment opportunities based on naïve measures. Further, though uncertainty has a negative impact on fund flow, the flow–performance relation is not sensitive to the level of uncertainty.

Suggested Citation

  • Elizabeth Nedumparambil & Anup Kumar Bhandari, 2022. "Risk factors, uncertainty, and investment decision: evidence from mutual fund flows from India," Indian Economic Review, Springer, vol. 57(2), pages 349-372, December.
    • Handle: RePEc:spr:inecre:v:57:y:2022:i:2:d:10.1007_s41775-022-00155-8
    DOI: 10.1007/s41775-022-00155-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Mutual fund; Fund flows; Investor preference; Flow–performance relation; Uncertainty;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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