Do mutual funds gain out of investments in derivatives and offshore markets: Evidence from India

Abstract

Investments in derivative market and overseas markets by Mutual Funds has generated substantial interest among many stakeholders, but there is no empirical evidence exist that documents how derivatives and overseas investments are actually used by investment managers in India. This paper analyzes the use of derivatives and overseas investments by equity diversified mutual funds. It was found that the size of the mutual funds and the number of mutual funds managed by the Asset management Company influences the decision to invest in Mutual Funds. The extent of investment in derivatives is determined by the size of the funds. In general, use of mutual funds did not improve the performance of the mutual funds. Users of derivative do not exhibit superior timing skill in comparison to non-users. For funds investing in overseas markets, we found that the correlation between their return and domestic market return is weak. This indicates that international mutual funds are successful in achieving their objective of decoupling their performance with the fluctuations in the domestic markets. In terms of returns the international funds any significant improvement over funds investing in domestic securities was not observed which essentially implies that investments in foreign markets can be used effectively as a diversification tool by mutual funds.