The Nexus between Resource Mobilization by Mutual Funds and Economic Growth in India

Abstract

Mutual funds allow for portfolio diversification and relative risk aversion through collection of funds from the households and investment of the same in the stock and debt markets. In this process, mutual funds industry plays the most important role of a resource mobilizer. As a resource mobilizer, the industry collects the investible surpluses from the surplus-spending units and channelizes the same to the deficit-spending units of an economy. Such a function has wide relevance for a developing country like India. Arguably, mutual funds industry as a resource mobilizer appears to contribute to real economic growth of a country by reducing the transaction costs and raising the purchasing power of the investors. Thus, this article is an attempt to investigate the dynamics of the relationship between gross funds mobilized by mutual funds and the real economic growth of a developing country like India for the period 1970–71 to 2008–09. Using the time series econometric techniques of cointegration and error correction estimates, the study concludes that the growth in real gross domestic product Granger causes gross resource mobilization by mutual funds in the long run, but not in the short run. This finding supports the demand-following hypothesis and thus, the policy implication is that the real economic growth of India may be considered as the policy variable to augment the resource mobilization by mutual funds.