Risk-return relationship in India’s mutual fund market: an exploration along capital asset pricing model

Abstract

The mutual fund industry has emerged as a significant component of India’s financial system, reflecting increasing investor participation and deepening capital markets. This study examines the growth trends, performance behaviour, and risk–return dynamics of selected mutual funds in India over the period 2016–2025, with particular emphasis on testing the validity of the Capital Asset Pricing Model (CAPM). The analysis is based entirely on secondary data comprising Assets Under Management (AUM) and daily Net Asset Values (NAVs) of 30 selected mutual funds across equity, sectoral, thematic, and debt categories. Monthly returns and risk measures were analysed using time-series regression and ordinary least squares (OLS) estimation. The results indicate a strong and statistically significant growth trend in the Indian mutual fund industry, despite short-term disruptions. The performance trend analysis reveals limited evidence of return persistence over time. The risk–return analysis provides substantial empirical support for the CAPM in the case of equity-orientated mutual funds, including small-cap, mid-cap, large-cap, sectoral, and thematic schemes, where market risk is positively and significantly priced. In contrast, debt-orientated mutual funds exhibit weak conformity to the CAPM, reflecting the dominance of interest rate and credit risk factors. The findings contribute to the empirical literature on mutual fund performance and asset pricing in emerging markets.