Vector Error Correction Model (VECM) In Mutual Fund Prediction and Performance in Changing Economic Conditions

Abstract

Changing economic conditions in rural and urban areas can have a good or negative impact on the economy. The shifting economic situation is a key aspect of India's national economy, and financial investment is one of the core measurements of capital spending in India. The current study looks at the impact of macroeconomic variables on mutual fund schemes in provisions of returns and volatility, as well as developing a prediction model. The correlation technique is used to determine the relationship between certain mutual fund NAVs and macroeconomic variables like inflation, interest rates, and GDP rate. The analysis employed yearly rates of several selected macroeconomic factors as well as NAVs of select mutual fund schemes from April 2012 to March 2021 as data. We also develop impulse responses and variance decompositions to show the effects of macroeconomic issues on the Indian economic market. Statistical analysis and methods: Vector Error Correction Model is a VAR model for non-stationary data series with a co-integration connection (long term relationship). Sharpe and Treynor ratios are also used to assess a fund company's benchmark features. This article discovered that macroeconomic factors and NAVS of specific mutual fund schemes had both positive and negative correlations. These preliminary findings suggest that the Indian economic status downward tendency has been slowed in the post-reform years.