Assessing Equity Based Mutual Funds and Stock Market Indices in India Using the Engle-Granger Cointegration Technique

Abstract

Mutual funds are one of the most suitable investment alternatives for common investors. Mutual funds are affordable, professionally managed, transparent, and at the same time, offer a wide gamut of schemes to invest in. They can generate superior returns and, at the same time, reduce risk through the diversification of the portfolio. Out of various schemes offered by mutual funds, equity funds are quite popular among investors because of their ability to generate higher returns. They not only generate higher returns but also sometimes beat the market. As the portfolio of equity-based mutual funds consists of equity shares, the movement of NAVs of these funds and stock market indices' movement are often found to be highly correlated. This study attempts to determine the long-term relationship between returns generated by prominent equity-based mutual funds across various categories and the returns of stock market indices in India by Engle-Granger test of cointegration and Johansen's cointegration test. For this study, 10 selected prominent funds under each equity-based mutual fund category operating in India and the two most diversified stock market indices of India (i.e., BSE 200 and Nifty 500) have been taken. The study reveals a high long-term equilibrium between equity mutual funds and stock market indices, which ultimately helps investors make investment decisions