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

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.