Investor confidence and mutual fund performance in emerging markets: insights from India and Pakistan

Purpose: This paper investigates the impact of investor confidence on mutual fund performance in two relatively vulnerable but leading emerging markets, India and Pakistan.
Design/methodology/approach: A pooled OLS model is used to look at two alternative measures of investor confidence and test for the relationship between investor confidence and mutual fund returns. To check the robustness of the findings, the authors also implement Two Stage Least Squares and Generalized Method of Moments techniques to control for unobserved heterogeneity, simultaneity, and dynamic endogeneity problems in the regressors.
Findings: The paper finds that the returns of mutual funds are positively associated with investor confidence and an interaction effect exists between investor confidence and persistence in performance. The paper also confirms that returns from mutual funds are associated with different fund characteristics such as fund size, turnover, expense, liquidity, performance
persistence and the fund’s age. These findings remain robust to alternative model specifications and measures of investor confidence.
Originality/value While the previous literature mainly focuses on mutual fund characteristics and the macroeconomic determinants of mutual fund returns, this paper demonstrates that investor confidence plays an important role in determining mutual fund performance. The authors attribute this finding to two relatively unique features of the emerging markets in our study. A lack of awareness of mutual funds as being a low-cost investment vehicle and the interplay of cultural and behavioural changes have prevented investor’s savings from being channelled into investment products, away from gold or property.

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This is the accepted version of the manuscript "Investor confidence and mutual fund performance in emerging markets: insights from India and Pakistan", published in the "Journal of Economic Studies" available via the journal site at: https://doi.org/10.1108/JES-07-2017-0175