Do Mutual Funds Make Active and Skilled Liquidity Choices in Portfolio Management? Evidence from India

ArXiv ID: 2510.02741 “View on arXiv”

Authors: Pankaj K Agarwal, H K Pradhan, Konark Saxena

Abstract

This study examines active liquidity management by Indian open-ended equity mutual funds. We find that fund managers respond to inflows by increasing cash holdings, which are later used to purchase less-liquid stocks at favourable valuations. Funds with less liquid portfolios tend to maintain larger cash reserves to manage flows. Funds that make active liquidity choices yield statistically and economically significant gross and net returns. The performance differences between funds with varying activeness in altering liquidity highlight the importance of active liquidity management in markets with substantial cross-sectional liquidity differences such as India.

Keywords: Liquidity Management, Mutual Funds, Active Investing, Cash Holdings, Market Microstructure, Equities

Complexity vs Empirical Score

• Math Complexity: 4.0/10
• Empirical Rigor: 8.0/10
• Quadrant: Street Traders
• Why: The paper employs standard econometric techniques like panel regressions with fixed effects and portfolio sorts, but lacks complex mathematical derivations or advanced stochastic modeling. It is highly data-driven, relying on detailed mutual fund holdings data from India, and presents clear empirical results suitable for implementation.

  flowchart TD
    A["Research Question: Do active liquidity choices enhance fund performance?"] --> B
    subgraph B ["Methodology & Data"]
        B1["Data: Indian Open-Ended Equity Mutual Funds"]
        B2["Variables: Cash Flows, Cash Holdings, Stock Liquidity"]
    end
    B --> C["Process: Regress Portfolio Liquidity & Returns vs. Fund Activeness"]
    C --> D["Control for Fund Size, Style, Market Conditions"]
    D --> E["Key Findings: Active Liquidity Management leads to significant gross & net returns"]