Mutual funds are popular financial intermediaries and manage disposable income of the investors so as to bring them the benefits of equity investment. History of mutual funds management in India is rather new, vis-à-vis, mutual funds in USA or UK. Yet, the mutual fund industry in India has caught the attention of millions of investors with diverse interests around the basic principles of investments viz., safety, liquidity and returns. This paper examines the rates of returns generated by equity mutual funds, vis-à-vis, 364 days T-bills and the Bombay Stock Exchange-100 (BSE-100) National Index during the period 1993-2002. Rate of return on 364 days T-bill is the surrogate measure for risk-free return and the BSE-100 National Index has been chosen as proxy for market portfolio in our analysis. Equity mutual funds predominantly invest in company equities, and hence, are risky investments. While choosing to invest in equity mutual funds, the investors expect not only risk premium but also better returns than the market portfolio. Risk premium refers to the returns earned by the investment in excess of risk-free returns. Thus, the investors expect equity mutual funds to earn better returns than the risk-free returns as also the market returns. A sample of 36 equity mutual funds has been drawn from 21 asset management companies belonging to private and public sectors. The sample is a true representative of the universe, as it constitutes more than two-thirds of the total equity mutual funds operating in India in terms of number as well as assets under management. The sample has been classified into two groups based on ownership pattern, namely, private sector company sponsored equity mutual funds (19) and public sector undertaking sponsored equity mutual funds (17).

The objective of this paper is to assess the financial performance of equity mutual funds in terms of profitability for a nine-year period, 1993-2002. Rate of return is the commonly accepted measure for assessing the profitability of equity mutual funds. The rates of return of equity mutual funds depend upon the choice of equities in the mutual fund portfolio. Equities are high-risk investments, hence, investors expect risk premium on their investments in equity mutual funds. Thus, risk premiums as well as better returns than the market returns are twin expectations of the investors. The rationale of investing through mutual funds, as financial intermediaries, is that an investor can earn a better rate of return through them due to their unique features such as expert management and broad diversification of the portfolio and so on.