Are Debt Mutual Funds Efficient, Too? Evidence from the Indian Mutual Fund Industry

The efficacy of debt mutual funds in the Indian investment market is critical. Therefore, their technical efficiency must be evaluated. Data envelopment analysis (DEA) was used to analyze the efficacy of long and short categories of debt funds offered to Indian investors and provide suggestions to regulators, practitioners, and policymakers. We use secondary data on 34 large debt mutual funds from the financial reports of the Association of Mutual Funds in India (AMFI) from 2019 to 2023. According to our analysis, Indian debt funds experienced an average efficacy of 95.88% with a variation of 2.66% in their efficiency scores during the study period. We performed a robustness check by dividing the sample into short- and long-term debt mutual funds to investigate the stability of our DEA-based efficiency estimates. The Mann–Whitney test findings show a statistically significant difference in efficiency between the two groups. Long-term funds experienced 94.52% average efficiency with a variation of 5.29%, whereas short-term funds experienced an average efficiency of 97.59%, with a variation of 1.59%. Our results show that 50% of debt funds are maximally efficient in 2021, and the minimum of 26.47% is efficient in 2023. With a variation of 1.36%, the average efficiency increased to 99.24% by 2021, becoming the highest. The minimum efficiency of debt funds was 92.46% in 2020, with an 8.64% variation. This study also proves that the risk of investment influences the performance of the fund more significantly than the associated expenses. By emphasizing risk-sensitive performance, this study provides actionable insights for enhancing the operational efficiency of debt mutual funds and contributes to the limited literature on the efficiency evaluation of fixed-income funds using a non-parametric framework.