Causality between equity mutual fund flows, stock market return and volatility: Indian evidence

Inderjit Kaur and Kamal Vagrecha

International Journal of Business and Globalisation, 2023, vol. 35, issue 1/2, 88-106

Abstract: Stock markets reflect the sentiment of investors for economy. Since retail investors usually participate in stock market through equity mutual funds, their fund flows may reflect either investor sentiment for economy or in turn, may affect stock market performance and volatility. This study examined causal relationship between equity mutual fund flows, and stock market's performance and volatility in Indian market during 2003-2018 with VAR methodology. The findings suggest stock market returns Granger causes mutual fund flows. Mutual fund flows are driven by stock market returns but cause stock market volatility. The findings are robust to presence of market fundamentals. The important implication of study is explanation of confidence among Indian investors (in year 2018) for equity mutual funds. The strong fundamentals of stock market drive investor sentiment and hence equity mutual fund flows. However, entry and exit from mutual funds affect stock market volatility.

Keywords: mutual funds; stock market; volatility; EGARCH; vector auto regression; VAR; causality. (search for similar items in EconPapers)
Date: 2023
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