Mutual fund asset allocation during COVID-19: evidence from an emerging market

ABSTRACT

The paper examines the investment decisions of Indian equity mutual funds during various stages of the COVID-19 pandemic with monthly portfolio holdings. We find that funds favoured firms with lower risk, higher financial flexibility, and larger size during the early months of the pandemic. The preference for relatively low-risk firms, which reverses later, suggests a reallocation towards safer assets. Funds also preferred growth firms to value firms as the latter with greater invested capital are more vulnerable to the shock. Institutional investors also favoured group-affiliated firms throughout, reflecting their lower crisis vulnerability. We find that the stocks preferred by funds during the pandemic outperform others in the long run. The paper brings out key firm characteristics that impact mutual fund asset allocation during extreme uncertainty.

KEYWORDS:

• COVID-19
• fund flows
• mutual funds
• India
• asset allocation
• institutional investors

JEL CLASSIFICATION:

• G11
• G14
• G23

Acknowledgments

We acknowledge the valuable comments and suggestions by the Editor, Mark Taylor, and the anonymous reviewers. We also thank Vidhu Shekhar and Sivananth Ramachandran of CFA Institute India, Rajiv Thakker, CIO and director of Parag Parikh Financial Advisory Services, G. Sethu, Avijit Bansal, Sumit Saurav, Bharati Singh, and the seminar participants at the India Finance Conference 2022 at Indian Institute of Management Calcutta and the brown bag seminar participants at the Indian Institute of Management Ahmedabad for their valuable comments and suggestion. Usual disclaimers apply. The author names appear in reverse alphabetical order.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ SEBI Handbook of statistics 2020.

² The swing pricing norms are mandated from May 2022.

³ The details of the portfolio holdings are typically released by mutual funds within ten days after the end of the month. We use data from April 2018 to July 2020 to check the robustness of our results.

⁴ The data excludes ETFs, index funds, close-ended funds, and hybrid funds. The primary scheme codes correspond to the ‘oldest share class’ in the Morningstar database.

⁵ Financial firms are excluded as the interpretation of several firm-level characteristics employed in the analysis, such as leverage and liquidity, are substantially different for such entities.

⁶ 1.33 multiplied by the coefficient value of 0.14.

⁷ Securities and Exchange Board of India.

⁸ Mutual funds were ordered to standardize their scheme categories and the characteristics of each category to ensure uniformity in the investment universe of equity schemes.

⁹ Zones with higher potential for infections, as classified by the government.

¹⁰ The table of results with the extended pre-treatment window can be downloaded from the following link https://bit.ly/3Dd2dT7.