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A STUDY OF FUND SELECTION BEHAVIOUR OF INDIVIDUALINVESTORS TOWARDS MUTUAL FUNDS - With Reference To Mumbai City

- Ms. Kavitha Ranganathan (M.Phil – Commerce), Madurai Kamaraj University

ABSTRACTConsumer behaviour from the marketing world and financial economics has brought together to thesurface an exciting area for study and research: behavioural finance. The realization that this is aserious subject is, however, barely dawning. Analysts seem to treat financial markets as an aggregate ofstatistical observations, technical and fundamental analysis. A rich view of research waits thissophisticated understanding of how financial markets are also affected by the ‘financial behaviour’ ofinvestors. With the reforms of industrial policy, public sector, financial sector and the manydevelopments in the Indian money market and capital market, Mutual Funds which has become animportant portal for the small investors, is also influenced by their financial behaviour. Hence, thisstudy has made an attempt to examine the related aspects of the fund selection behaviour of individualinvestors towards Mutual funds, in the city of Mumbai. From the researchers and academicians point ofview, such a study will help in developing and expanding knowledge in this field.

1. INTRODUCTION

The Indian capital market has been growing tremendously with the reforms of the industrial policy,reforms of public sector and financial sector and new economic policies of liberalization, deregulationand restructuring. The Indian economy has opened up and many developments have been taking place inthe Indian capital market and money market with the help of financial system and financial institutions orintermediaries which foster savings and channels them to their most efficient use. One such financialintermediary who has played a significant role in the development and growth of capital markets isMutual Fund (MF).

The concept of MFs has been on the financial landscape for long in a primitive form. The story of mutualfund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of theGovernment of India and Reserve Bank. The launching of innovative schemes in India has been ratherslow due to prevailing investment psychology and infrastructural inadequacies. Risk adverse investorsare interested in schemes with tolerable capital risk and return over bank deposit, which has restricted thelaunching of more risky products in the Indian Capital market. But this objective of the MF industry haschanged over the decades. For many years funds were more of a service than a product, the service beingprofessional money management. In the last 15 years MFs have evolved to be a product. The term‘ product’ is used because MF is not merely to park investor’ s savings but schemes are ‘ tailor made’ tocater to investor’ s needs, whatever their age, financial position, risk tolerance and return expectations.This issue of combining service and product will be an important one for the next decade.

Mutual funds have opened new vistas to millions of small investors by virtually taking investment totheir doorstep. In India, a small investor generally goes for bank deposits, which do not provide hedgeagainst inflation and often have negative real returns. He has limited access to price sensitive informationand if available, may not be able to comprehend publicly available information couched in technical andlegal jargons. He finds himself to be an odd man out in the investment game. Mutual funds have come,as a much needed help to these investors. MFs are looked upon by individual investors as financialintermediaries/ portfolio managers who process information, identify investment opportunities, formulateinvestment strategies, invest funds and monitor progress at a very low cost. Thus the success of MFs isessentially the result of the combined efforts of competent fund managers and alert investors. Acompetent fund manager should analyze investor behaviour and understand their needs and expectations,to gear up the performance to meet investor requirements.

2. STATEMENT OF THE PROBLEM

In India, though the MF industry has been in existence since 1964, (with the establishment of UTI), nomajor study has been done regarding the investor behavioural aspect with specific reference to MFs, inIndia. It should be noted that the “expectations” of investors play a vital role in the financial markets.They influence the price of the securities, the volume traded and various other financial operations in

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actual practice. These ‘ expectations’ of investors are influenced by their “perception” and humansgenerally relate perception to action. The beliefs and actions of many investors are influenced by thedissonance effect and endowment effect.

The tendency to adjust beliefs to justify actions is a psychological phenomenon termed by Festinger(1957) as “Cognitive Dissonance”. We find the evidence of prevalence of such a psychological stateamong MF investors in India. For instance, UTI, which is synonymous to mutual funds in India, had aglorious past and perceived as a safe, high yield investment vehicle with the added tax benefit. ManyUTI account holders have justified their beliefs by staying invested in UTI schemes even after the 1999bail out and the July 2001 episode of repurchase freeze on US 64 for 6 months. “Endowment Effect” isexplained by Thaler Kahneman and Knetsh (1992) thus: “People are more likely to believe thatsomething they own is better than something they do not own” . We have evidence of this effect alsoamong Indian MF investors, for, how else we can explain the existence of many poor performing fundswith investors staying invested with them?

In general, rules for investment, the analysis of investment and discussion of financial behaviour tend toassume behaviour, which is logical and internally consistent in various ways. Investor behaviour doesnot; however, always appear to conform to such expectational norms. Quite the reverse often appears tobe the case; Kahneman and Riepe speak of “Cognitive Illusion” the mental equivalent of optical illusion,the assumption being that just as an optical illusion might lead to inconsistent physical performancerelative to the world outside the individual, so too cognitive illusion will result in inconsistent decisionmaking with respect to the outside world. Much of economic and financial theory is based on the notionthat individuals act rationally and consider all available information in the decision making process.However, in the financial literature, there are no clear models, which explain the influence of“perception” and “ beliefs” on “expectations” and “ decision making”. No doubt, reality is so complex thattrying to fit individual investor’ s behaviour into a model is impossible. Investor’ s behaviour may changefrom period to period even if the other variables influencing the behaviour are held constant. However, toa certain extent, we can borrow concepts from social psychology where behavioural patterns, rational andirrational are observed and empirically tested. On the same lines we can develop certain models toidentify the financial behaviour, to the extent of the availability of the explanatory variables. Suchmodels can help to understand the “why” and “how?” aspect of investor behaviour, which can havemanagerial implications for policy makers.

Hence, with this background, this study attempts to evaluate the behavioural aspects of fund selectiontechniques of individual investors and also to assess the conceptual awareness of MFs during the period,July 2004- December 2004.

3. LITERATURE REVIEW

MFs have attracted a lot of attention and kindled the interest of both academic and practitionercommunities. Compared to the developed markets, very few studies on MFs are done in India. Thisliterature review reveals Investor behaviour studies which can be grouped under two themes.3.1) Studies relating to General Financial Behaviour of Investors.3.2) Fund Selection Behaviour Studies.

3.1) General Financial Behaviour Studies:Daniel Kahneman and Amos Tversky (1979) originally described “ Prospect Theory” and found thatindividuals were much more distressed by prospective losses than they were happy by equivalent gains.Some economists have concluded that investors typically consider the loss of $1 twice as painful as thepleasure received from a $ gain. Individuals will respond differently to equivalent situations dependingon whether it is presented in the context of losses or gains. Here is an example from Tversky andKahneman 1979 article. Tversky and Kahneman presented groups of subjects with a number ofproblems. One group of subjects was presented with this problem.1. In addition to what you own, you have been given $1000. You are now asked to choose between

A. A sure gain of $500.B. A 50% chance to gain $1,000 and a 50% chance to gain nothing.

Another group of subjects were presented with another problem.2. In addition to whatever you own, you have been given $2000. You are now asked to choose between:

A. A sure loss of $500.B. A 50% chance to lose $1,000 and 50% chance to lose nothing.

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In the first group 84% chose A. In the second group 69% chose B. The two problems are identical interms of net cash to the subject; however the phrasing of the question causes the problem to beinterpreted differently.Langer (1983) suggests that when these preferences are based on choices, there is more ego involvementand attachment to the preferences, suggesting heightened level of preference bias. This phenomenon isconsistent with the prediction from Cognitive Dissonance theory of Festinger (1957).Robert J. Shiller (1993) reported that many investors do not have data analysis and interpretation skills.This is because, data from the market supports the merits of index investing, passive investors are morelikely to base their investment choices on information received from objective or scientific sources.Phillip (1995) reported that there is a change in financial decision-making and investor behaviour as aresult of participating in investor education programmes sponsored by employees.Berhein and Garnette (1996) affirmed Philip’ s findings and further stated that a serious nationalcampaign to promote savings through education and information could have a measurable impact onfinancial behaviour.Alexander et al., (1996) reported that only 18.9% of respondents could provide an estimate of expensesfor their largest MF holding. 57% stated that they did not know what the expenses were even at the timethey made the MF purchase. This suggests insensitivity to costs and many investors do not use fund costsas an evaluative criterion in making investment decisions.Hirshleifer (2001) categorized different types of cognitive errors that investors make i.e. self-deception,occur because people tend to think that they are better than they really are; heuristic simplification,which occurs because individuals have limited attention, memory and processing capabilities; dispositioneffect, individuals are prone to sell their winners too quickly and hold on to their losers too long(http://www.investorhome.com/psych.htm).

3.2) Fund Selection Behaviour Studies:Investor fund selection Behaviour influences marketing decisions of fund management and has capturedthe attention of researchers. The findings are reported below:

• Foreign Studies:

Ippolito (1992) and Bogle (1992) reported that fund selection by investors is based on past performanceof the funds and money flows into winning funds more rapidly than they flow out of losing funds.

Goetzman (1993) and Grubber (1996) studied the ability of investors to select funds and found evidenceto support selection ability among active fund investors.Malhotra and Robert (1997) reported that the preoccupation of MF investors with using performanceevaluation as selection criteria is misguided because of volatility of returns, which may be due tosuperior management or just good luck is difficult to determine. The findings of Ferris and Chance(1987), Trzeinka and Zwing (1990), and Chance and Ferris (1991) are consistent with the findings ofMalhotra and Robert (1997).Lu Zheng (1998) examined the fund selection ability of MF investors and found that the investor’ sdecisions are based on short-term future performance and investors use fund specific information in theirselection decision.• Indian Studies:Vidyashankar (1990), Agarwal G.D. (1992), Gupta L.C. (1993) Atmaramani (1996), Madhusudan (1996)and Ajay Srinivasan (1999) and others have conducted extensive research regarding investorexpectations, protection, awareness and fund selection behaviour. Few striking ones among the otherstudies are given below.

Gupta L.C. (1993) conducted a household investor survey with the objective to provide data on investorpreferences on MFs and other financial assets.

Madhusudhan V. Jambodekar (1996) conducted a study to assess the awareness of MFs amonginvestors, to identify the information sources influencing the buyer decision and the factors influencingthe choice of a particular fund. The study revealed that income schemes and open-ended schemes arepreferred over growth schemes and close-ended schemes during the prevalent market conditions.Investors look for Safety of Principal, Liquidity and Capital Appreciation in order of importance;Newspapers and Magazines are the first source of information through which investors get to know aboutMFs / Schemes and the investor service is the major differentiating factor in the selection of MFs.

Sujit Sikidar and Amrit Pal Singh (1996) carried out a survey with an objective to understand thebehavioural aspects of the investors of the North Eastern region towards equity and MFs investmentportfolio. The survey revealed that the salaried and self-employed formed the major investors in MFs

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primarily due to tax concessions. UTI and SBI schemes were popular in that part of the country then andother funds had not proved to be a big hit during the time when the survey was done.

Raja Rajan (1997, 1998) highlightened segmentation of investors on the basis of their characteristics,investment size, and the relationship between stage in life cycle of the investors and their investmentpattern.

Syama Sunder (1998) conducted a survey to get an insight into the MF operations of private institutionswith special reference to Kothari Pioneer. The survey revealed that the awareness about MF concept waspoor during that time in small cities like Vishakapatnam. Agents play a vital role in spreading the MFculture; open-end schemes were much preferred then; age and income are the two important determinantsin the selection of fund / scheme; brand image and return are their prime considerations.

An attempt was made by the NCAER in 1964 to understand the attitude and motivation for the savingsof individuals, for which a survey of households was undertaken. Another NCAER study in 1996analyzed the structure of the capital market and presented the views and attitudes of individualshareholders. SEBI-NCAER survey (2000) was carried out to estimate the number of households and thepopulation of individual investors, their economic and demographic profile, portfolio size, andinvestment preference for equity as well as other savings instruments. This is a unique andcomprehensive study of individual investors, for, data was collected from 3, 00,000 geographicallydispersed rural and urban households. Some of the relevant findings of the study are: Householdspreference for instruments match their risk perception; Bank Deposit has an appeal across all incomeclass; 43% of the non-investor households (estimated around 60 million households) apparently lackawareness about stock markets; and, compared with low income groups, the higher income groups have ahigher share of investments in MFs signifying that MFs have not truly become the investment vehicle forsmall investors; the number of households owning units of mutual funds is more (9%) than the investorhouseholds owning investments in shares and debentures (8%). Nevertheless, the study predicts that inthe next two years (i.e., 2000 hence) the investment of households in MFs is likely to increase.Shanmugham (2001) conducted a survey of 201 individual investors to study the information sourcingby investors, their perception of various investment strategy dimensions and the factors motivating shareinvestment decisions, and reported that, psychological and sociological factors dominated economicfactors in share investment decisions.

Rajeshwari T.R and Rama Moorthy V.E (2002) studied the financial behaviour and factors influencingfund/scheme selection of retail investors by conducting Factor Analysis using Principal ComponentAnalysis, to identify the investor’ s underlying fund/scheme selection criteria, so as to group them intospecific market segment for designing of the appropriate marketing strategy.

Kiran D. and Rao U.S. (2004) identified investor group segments using the demographic andpsychographic characteristics of investors using two statistical techniques, namely – MultinomialLogistic Regression (MLR) and Factor Analysis.An article by Personal fn (http://www.personalfn.com) for Business India August 2, 2004 with the title,“The Golden Nest Egg”, reported that, investor’ s age could be used as a benchmark to determine thenature of the portfolio.

Table 3.1INDICATIVE PORTFOLIOS FOR VARIOUS AGE GROUPS

AGE EQUITYMF

BALANCEDMF

MIPs DEBTMF

FIXEDINCOME

TOTALEQUITY

TOTALDEBT

Below 30 Yrs 50% 30% 5% 5% 10% 70% 30%30-45 Yrs 40% 30% 15% 5% 10% 60% 40%45-55 Yrs 25% 25% 25% 5% 20% 45% 55%Above 55 Yrs 5% 10% 40% 5% 40% 15% 85%

Review of Literature reveals that in developed markets lot of study has been done, but developingmarkets also deserve an extensive research.

4. OBJECTIVES OF THE STUDY

The study has the following general Objectives:A-1: To assess the savings objectives among individual investors.

A-2: To identify the preferred savings avenue among individual investors.

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A-3: To understand the preferential feature in the savings instrument among individual investors.

A-4: To assess Mutual fund conceptual awareness among present investors.

The study also attempts to test/assess other specific objectives such as:

B-1: To assess the fund/ scheme preference of investors.

B-2: To evaluate fund qualities that would affect the selection of Mutual funds.

B-3: To perceive the preferred communication mode of investors.

B-4: To understand the fund sponsor qualities influencing the selection of MFs/Schemes.

B-5: To identify the information sources influencing the scheme selection decision of investors.

B-6: To identify the most popular Mutual Funds among individual investors.

B-7: To assess the influence of personal variables on the MF conceptual awareness level ofindividual investors.

B-8: To evaluate investor related services that would affect the selection of Mutual funds.

B-9: To establish a relationship between types of investors and MF qualities that influenceMF/Scheme selection.

5. METHODOLOGY

5.1 Data and Data Sources:The study mainly deals with the financial behaviour of Individual Investors towards Mutual funds inMumbai city. The required data was collected through a pretested questionnaire administered on acombination of simple random and judgement sample of 100 educated individual investors. Judgementsample selection is due to the time and financial constraints. . Respondents were screened and inclusionwas purely on the basis of their knowledge about Financial Markets, MFs in particular. This wasnecessary, because the questionnaire presumed awareness of some basic terminology about MutualFunds. The purpose of the survey was to understand the behavioural aspects of individual investors,mainly their fund selection behaviour, various factors influencing this behaviour and also the conceptualawareness level among individual investors. The survey was conducted during September-October 2004,among 100 educated, geographically dispersed individual investors of Mumbai city. Sample of thequestionnaire is given in Annex I and Distribution of individual investors by Demographic factors isgiven in Annex II, A 2.1. The unit of observation and analysis of survey is only among IndividualInvestors whose definition is “ An Individual who has currently invested (i.e. as on September orOctober 2004) in any Mutual Funds and this does not include high net worth individuals (i.e., those whoearn above Rs. 10,00,000/- per annum) and institutions. Since it is an exploratory study no specifichypothesis is formulated.

5.2 Limitations of the Study:1. Sample size is limited to 100 educated individual investors in the city of Mumbai. The samplesize may not adequately represent the national market.2. Simple Random and judgement sampling techniques is due to time and financial constraints.3. This study has not been conducted over an extended period of time having both ups and downs ofstock market conditions which a significant influence on investor’ s buying pattern and preferences.

6. FINDINGS OF THE STUDY:

The survey conducted during September-October, 2004, in Mumbai, to capture investor behaviourpattern in selection of MFs, reveals the following.

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1. Savings Objective of Individual InvestorsSavings Objective of the majority of Individual Investors is ‘ to provide for Retirement’ , thus throwinglight on the nature of risk averse investors. AMC can attract a pool of investors by designing products forRisk-Averse investors.

2. Savings Instrument Preference among Individual InvestorsAsset preference pattern of investors provides an insight into the investment attitude of investors, whichwill influence the policy formation for garnering the individual savings. The study reveals that ‘ Pensionand Provident Fund’ are the most popular savings instrument among individual investors of Mumbai, asit is one of the few financial products, which enable an average salaried person to get reasonable andregular returns, along with safety of capital.

3. Current Attitude of Individual Investors towards the Following FinancialInstruments, In the Indian Capital Market.Every asset class has different characteristics. Stocks have the potential to provide high total returns withproportionate level of risk, while bonds may provide lower risks along with regular income. The attitudeof every individual investor may be influenced by their investment goals, risk tolerance, time horizon,personal circumstances or performance aspect of the asset class.The Financial instruments i.e. Shares, mutual Funds, Bonds and debentures were rated on a 5-point scale.Shares were rated as ‘ Favourable’ at 3.65 and MFs, Bonds and Debentures were rated in the ‘ SomewhatFavourable’ category. It is inevitable that there is a wide opportunity for MFs rated at 3.34 to slip into the‘ Favourable’ slot, as the MF sector is poised for growth. The MF industry has evolved in many aspectsi.e. product innovation, distribution reach, investor education or leveraging technology for enhancingservice standards. As MF is an ideal vehicle for both Debt and Equity products, it has the potential toemerge as one of the major growth drivers of the market in future.

4. Mutual Fund Investment Preference in Future.The study reveals that, there is a fair opportunity for MF investments in future as 39% of the respondentshave voted towards ‘ Yes’ . However, 21% have voted ‘ No’ and 40% as ‘ Not Sure’ as their preference infuture MF investment. However, the ‘ No’ and ‘ Not Sure’ category should be matter of concern to theAMCs. There must be ample reasons for 61% (21 + 40; No and Not Sure category) of the investors tohave posed a negative approach towards MFs. Firstly, AMCs should take steps and see that funds are notvirtually at the mercy of institutional investors. MFs should not indulge in unethical practices and launchschemes that benefit institutional investors at the cost of retail investors. Also, the AMCs should try andtap the NRI market, as they can diversify from Bank Deposits to MFs. The main task at hand for theAMCs is to tackle investor sentiments with greater transparency and credibility in the functioning

5. Mutual Fund Scheme Preference among Individual InvestorInvestors have a plethora of options ranging from Growth schemes to Fixed Income schemes. Now-a-days investors are not offered just plain vanilla schemes but an assorted basket to tune with their riskappetite. MF scheme preference for majority of investors is ‘ Growth Scheme’ . The preference for growthor any other scheme is also influenced by stock market conditions prevailing at the time of investmentdecision. The prevailing market conditions have prompted investors to look for growth schemes andincome schemes have become unattractive due to dropping interest rates. This further indicates thegrowing alertness of investors.

6. Scheme Preference by Operation among Individual InvestorsAnalysis of scheme preference by nature of operation reveals the popularity of ‘ Open- Ended’ scheme. InIndia majority of schemes are Open- Ended as investors can buy or sell units at NAV related prices.During 2003 –04, 46 new schemes were launched, of which 44 were Open Ended and 2 were CloseEnded. The preference to Open- Ended scheme has also given due importance to ‘ Liquidity’ . On theother hand, only 9% of the respondents have voted for ‘ Interval Schemes” which shows lack ofawareness with regard to this feature.

7. Preferential Feature in Mutual Funds among Individual InvestorsMr. M. Damodaran, Chairman of UTI, has summed the psyche of a typical Indian Investor in threewords; Yield, Security and Liquidity. The study also shows the investors’ need for ‘ Good Return’ ishighest among other features, followed by Safety, Liquidity, Tax Benefit, Capital Appreciation,Professional Management and Diversification Benefits.

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8. Preferable Route to Mutual Fund Investing Among Individual InvestorsInvestors may use some sources to gain awareness regarding investing in Mutual Funds. The sources inthe present study are confined to Reference groups, Newspapers – General & Business, FinancialMagazines, Television, Brokers/ Agents, E-Mail and Stores Display. Findings of the study reveal thatinvestors attach high priority to published information, thereby preferring Newspapers – General &Business and Financial Magazines. This throws light on the possibility that MF investors spend timeanalyzing and examining relevant information before taking any crucial decision.

9. Preferred Mode of Communication in Mutual Fund Investing Among IndividualInvestorsThe survey reveals that, 29% of the respondents of Mumbai city use Internet facility to know more aboutMFs. Another 29% of respondents prefer to get routine or special information like NAV, dividend,bonus, change in asset mix etc. by personally visiting the office. While 30% of the respondents prefer totelephone the office and 12% in the survey have no preferences. The results of the study show thatalmost equal importance is given to all modes of communication. This gives the message of catapultingimprovement in Internet and telecommunication services in India. Now-a-days financial services are ‘ justa phone call away’ . There is also possibility of more usage of automated services if made more ‘ userfriendly’ . This study was conducted in a cosmopolitan city, Mumbai, hence, the choice of the ruralpopulation can be guessed in favour of ‘ Personal Mode’ .

10. Preference of Mutual Fund Investing Over Equity InvestingThe emergence of an array of savings and investment options and the dramatic increase in the popularityof Mutual Funds, in the recent years in India, has opened up an entirely new area for value creation andmanagement. A house-holder investor with few rupees left over after paying for housing and two-wheeler installments, is puzzled as to where he must park his funds safely, given the volatility of themarket. The truth of the matter is that average Indian investor is a greenhorn when it comes to financialmarkets. The causes are many; lack of opportunity, lack of conceptual understanding and the influence offixed income orientation in the Indian culture.

The study too revealed that 48% of the small investors of Mumbai preferred to invest in MFs .The theorybehind this is that, by pooling together a huge aggregation of individual savings and investing them,using the professional judgment of the fund manager, one spreads risk, takes advantage of volumebuying and scientific data analysis, expertise and so on. This seems to be an ideal option for theindividual who does not have the time, knowledge and expertise to make a succession of judgmentsinvolving hard earned savings.

On the other hand, there emerged another category of people, which evolved to 31% according to thestudy, who do not want to be at the mercy of the broker-friend-advisor network. These individualinvestors are able to articulate their own situation and risk preference and then apply a strategy thatcombines the usual four; cash and equivalents, government bonds, debt and equity. The catch is that onlyfew have the capability to do the dynamic juggling among the four on their own. The study reveals yetanother category of respondents, ‘ Do Not Know’ , which sums up to 21%. This category may includepeople who either have a low awareness level about MF industry or still do not completely believe thatMFs can get the same return like that of Equity shares. This calls for an extensive and comprehensiveeducation programme among the people.

11. Mutual Fund Conceptual Awareness Level of Individual InvestorsInvestors, while taking their investment decisions use unique internal characteristics (influenced by theircognitive domain) and also yield to the environmental pressures of the external financial markets.‘ Awareness’ belongs to the cognitive domain. Hence, it is essential for the AMCs to know the level ofawareness about MFs among the investing public. This will enable them to create an externalenvironment that can influence investment decisions of investors. The study reveals that the generalawareness level among individual investors of the concept and functioning of MFs is good.

The number of respondents who have good awareness level of MFs results to 53%. This could beattributed to the wide publicity given to MF industry by the media for varied reasons. Agent trainingprogrammes and investor education programmes organized by AMFI at regional levels during 2003-04could also have contributed to this level of awareness However, this study was based in a metropolitancity of Mumbai where the awareness level may be considerably high. But, the litmus test for the industry

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is the expansion of the distribution network to smaller urban and rural areas where most of the smallinvestors live. The challenge would be to educate these investors about the advantages of investing inmutual funds compared to traditional saving instruments.

The results of Chi-Square test shows that Awareness level is Dependent only on AcademicQualifications. AMCs should take note of this and follow a segmented approach in marketing the productand in creating awareness.

12. Top-of-Mind-Recall of Mutual Funds/Schemes among Individual InvestorsTop-Of-Mind Recall throws light on the strength of brand identity, awareness, acceptability andpreference. This calls for a high degree of brand equity and loyalty, which is the direct result of thepromotion strategy of the AMCs and a good performance over a period of time. MFs are no more justfinancial instruments, rather a product or a service, which should be tailor-made to attract and retaininvestors. AMCs should realize that it is not just the USPs (Unique Selling Propositions) that count, butthe ESPs (Extra Sensory Perceptions), which will help to track, gauge and deliver satisfaction to thetargeted investor groups.

Top-Of-Mind Recall test of Mutual Funds was administered in the questionnaire, which was distributedto 100 respondents during September – October 2004, in Mumbai. This study yielded superlative resultswhere 22 registered MFs (not schemes) were recalled by the investors, UTI being most promptlyremembered among the investors. It is baffling to know that out of 37 registered MFs, 22 MFs (notschemes) were recalled, in a few moments of time spent by the investor in filling up the questionnaire.

13. Factors Influencing Fund/Scheme Selection by Individual InvestorsA set of 25 statements, sub grouped into Fund related factors, Sponsor related factors and Investorservice related factors, were used to assess the scheme selection behaviour of investors. Among the 11fund related variables analysed ‘ Fund Performance Record’ was considered as ‘ Highly Important’ ;among the 6 Sponsor Qualities related variables analysed ‘Sponsor’ s expertise in managing money’ hadthe highest WMV of 4.14 and was closely followed by ‘ Reputation of the sponsoring firm’ . Lastlyamong the analysis of the 8 statements formulated regarding ‘ Investor related services’ all variables wereconsidered ‘ Important’ except ‘ Fringe benefits’ .

14. Factor Analysis Using Principal Component Analysis“Often among the many variables you measure, a few are more related to each other, than they are toothers. Factor Analysis allows us to look at these groups of variables that tend to relate to each other andestimate what underlying reasons might cause these variables to be more highly correlated with eachother” , Jeff Miller, Vice President, consulting and analytical, Burke, Inc. (Source: Marketing Research,Naresh K Malhotra).

This tool of SPSS was extensively used to classify a large number of variables into smaller number offactors. Factor Analysis was used to determine whether there was any common constructs thatrepresented investor concerns. 25 variables were analysed using the Varimax Algorithm of OrthogonalRotation, the most commonly used method. Evaluation of the resulting constructs and naming of thefactors is largely subjective. Hence, to identify investors’ underlying Fund/Scheme selection criteria, soas to group them into specific factors, which would further identify Investor types, to enable thedesigning of appropriate marketing strategies, Factor Analysis was done using Principal ComponentAnalysis.• Factor analysis for Fund Related QualitiesIn the Fund related qualities analysis, 11 variables were analyzed. Bartlett's test of sphericity and Kaiser-Meyer Olkin (KMO) measure of sampling adequacy were used to examine the appropriateness of factoranalysis. The approximate chi-square statistic is 249.175 with 55 degrees of freedom, which is significantat .000 levels. The KMO statistic (0.810) is also large (>0.5) Hence factor analysis is considered anappropriate technique for further analysis of data.

Retaining only the variables with Eigen values greater than one (Kaiser's criterion), we can infer that34.818% of variance is explained by factor 1; 10.857% of variance is explained by factor 2 and 9.277%of variance is explained by Factor 3 and together, all the factors contributed to 54.952% of variance.Factor loadings are very high in case of factor 1(9 out of 11 variables have factor loading >0.5).Therefore, Varimax Rotation was done to obtain factors that can be named and interpreted. UnderVarimax Rotation 5 out of 11 variables have factor loadings>0.5 in case of factor 1. This reveals that

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45% of variables are clubbed into one factor. On the basis of Varimax Rotation with KaiserNormalisation, 3 factors have emerged. Each factor is constituted of all those variables that have factorloadings greater than or equal to 0.5. Thus A1, A2, A3, A4, and A10 constituted the first factor. It isconceptualized as “ Intrinsic Fund Qualities "(consistent performance and reliability); A5, A7 and A8constituted the second factor and this is conceptualized as "Credibility of Image"(trustworthy andreputable, with investor’ s interests at heart); A6, A9 and A11 constituted the 3rd factor and areconceptualized as "Flexible Investment Facilities"(simplicity and tailor-made investment patterns). Thus,after rotation, factor 1(Intrinsic fund qualities) accounts for 20.594% of variance; factor 2(Credibility ofImage) accounts for 17.735% of variance and factor 3 accounts for 16.624% of variance and all 3 factorstogether explain for 54.952% of variance.

The result, revealed 3 distinct factors which could further be associated to different types of Investors i.e.Professional Investors, Image Conscious Investors & Cautious Investors.Professional Investors: This type of investors have had some training to invest in financial investments,indicating his confidence that he wouldn’ t lose more money than he would gain. Hence, ProfessionalInvestors are those who demand intrinsic fund qualities as their primary requirement before investing inMF/scheme. Fund performance & reputation, expense ratio, portfolio of investment & load factors aretheir core concerns.Image Conscious Investors: They define those types of investors who attach importance to reputationand brand name. Reputation of fund manager, credibility & rating by agencies are fund qualities theywould look forward to.Cautious Investors: These types of investors are generally risk averse and would prefer flexibility ininvestment patterns which would further reduce his risk profile. Factors like withdrawal facilities &minimum initial investment are their primary choice. Sometimes he may look for innovative schemes,which may appease his risk appetite.• Factor analysis for Sponsor Related QualitiesRetaining only variables with Eigen Values greater than 0.5, we can infer that 53.441% of variance isexplained by factor 1 and 13.545% of variance is explained by factor 2, both together contributing66.985%.A scrutiny of Factor Matrix reveals that factor loadings are very high in case of factor 1(all six variableshave factor loadings>0.5). It reveals that all variables are clubbed into one factor. Therefore, VarimaxRotation was done to obtain factors that can be named and interpreted. On the basis of Varimax Rotationwith Kaiser Normalisation, 2 factors emerged. Each factor is constituted of all those variables that havefactor loadings greater than or equal to 0.5. Thus B4, B5 and B6 constituted the first factor. It isconceptualized as "Competent Performance" and B1, B2 and B3 constituted the second factor and thisconceptualized as "Reputation". Thus, after rotation, factor 1 "Competent Performance"(possessingknowledge, skills and infrastructure for consistent performance.) accounts for 33.761% of variance andfactor 2 "Reputation"(general recognition and approachability for ease of contact.) accounts for 33.224%of variance and together they explain for 66.985% variance. UTI, the oldest and the largest fund, knownfor its well-knit agency network, topped the 'Top of Mind Recall test’ . This supports the finding thatsponsor's performance and reputation do largely influence Investor perception and behaviour.

The factors thus extracted have enabled to identify types of investors who give importance to thesefactors in their fund selection techniques.Professional Investors: This category of investors identifies Sponsor's past performance, developedresearch and infrastructure & money management expertise as essential in Fund Sponsor Qualities.Image Conscious Investors: Reputation, brand name & developed agency and network of the Sponsoringfirm are the major factors influencing fund selection behaviour of investors.• Factor Analysis for Investor Related ServicesRetaining only variables with Eigen values greater than 1, we can infer that 44.541% of variance isexplained by factor 1, while 18.520% of variance is explained by factor 2 and cumulative % is 63.061.Data analysis for Investor Service Related Qualities on the basis of Varimax rotation with KaiserNormalisation revealed the emergence of 2 factors. Each factor is constituted of all those variables thathave factor loading greater or equal to 0.5. Thus C1, C2, C3, C4, C5 & C6 constituted the first factor. Itis conceptualized as "Transparent Disclosure"(willingness to reveal necessary and importantinformation), C7 & C8 constituted the 2nd factor, which is conceptualized as "Tangibles/FringeBenefits"(facilities and physical features towards understanding needs of investors). Thus, after rotation,factor 1 account for 40.219% of variance, factor 2 accounts for 22.842% of variance and together theyaccount for 63.061% of variance. The identified factors with associated variables and factor loadings aregiven in table 6.1.

10

Therefore, investors are prominently influenced, in the selection of schemes, by the extent and quality ofdisclosure of information subsequent to their investment, regarding disclosure of NAV, portfolio ofinvestment and disclosure of deviation from the stated objectives and the attached fringe benefits to theschemes. Hence AMCs should take steps to be transparent and follow the disclosure norms spelt out bySEBI and AMFI in this connection.

The factors thus extracted have enabled to identify types of investors who give importance to thesefactors in their fund selection techniques.Professional Investors: This category of investors identify Disclosure norms as prescribed by SEBI andAMFI as significant factors in investor services i.e. Disclosure of investment objectives, periodicity ofvaluation, method and periodicity of schemes sales & repurchases, disclosure of NAV on every tradingday & disclosure of deviation of investments from the original pattern. The need for Investor's grievanceredressal machinery is also felt significantly from the point of view of Individual Investors.Approachability to the right people who possess knowledge & skills and are responsive in solvingproblems of investors efficiently is the need of the hour. This calls for ' Investor Knowledge';understanding needs personalized attention and effective communication to investors.Image Conscious Investors: These investors give importance to services i.e. investor's grievanceredressal machinery or fringe benefits i.e. free insurance, credit cards, loans on collateral or tax benefitsand prefer MFs to avoid bad deliveries & unnecessary follow-up with brokers and companies.

Table 6.1Results of Principal Component Analysis – Identification of Factors that affect Mutual

Fund/Scheme Selection

Factor Name Attributes leading at 0.5 or more Loading % of exvar*

Cumulative% of ex.var

I Fund Related Qualities

A1. Fund performance record 0.742 20.594 20.594

A2. Fund’ s reputation or brand name 0.583

A3. Scheme’ s expense ratio 0.634

A4. Scheme’ s portfolio of investment 0.689

1 Intrinsic FundQualities

A10. Entry and exit load 0.414

A5. Reputation of fund managers/scheme

0.688 17.735 38.328

A7. Favourable rating by a ratingagency

0.778

2. Credibility ofImage

A8. Innovativeness of the scheme 0.660

A6. Withdrawal facilities 0.494 16.624 54.952

A9. Products with tax benefits 0.799

3. Flexible InvestmentFacilities

A11. Minimum initial investment 0.723

II Fund Sponsor QualitiesB1. Reputation of sponsoring firm 0.731 33.761 33.7611. Reputation

B2. Sponsor has a recognised brandname

0.807

11

Factor Name Attributes leading at 0.5 or more Loading % of exvar*

Cumulative% of ex.var

B3. Sponsor has a well developedagency and network

0.748

B4. Sponsor’ s expertise in managingmoney

0.706

B5. Sponsor has a well developedresearch and infrastructure

0.876

2. CompetentPerformance

B6. Sponsor’ s past performance interms of risk and return

0.739

III Investor Related Services

C1. Disclosure of investmentobjective

0.799 40.219 40.219

C2. Disclosure of periodicity ofvaluation

0.812

C3. Disclosure of the method andperiodicity of the schemes sales andrepurchases

0.719

1. TransparentDisclosure

C4. Disclosure of NAV on everytrading day

0.724

C5. Disclosure of deviation ofinvestments from the original pattern

0.732

C6. Mutual Fund’ s investor’ sgrievance redressal machinery

0.571

C7. Fringe benefits 0.855 22.842 63.0612. Tangibles/ FringeBenefits

C8. Prefer MF to avoid problems ofbad deliveries and follow up withbrokers and companies

0.893

15. Multinomial Logistic RegressionMultinomial Logistic Regression (MLR) can be used to predict a dependent variable on the basis ofindependents and to determine the percent of variance in the dependent variable explained by theindependents, to rank the relative importance of independents and to assess interaction effects. In thisstudy, MLR was employed to seek a relationship between Fund qualities that affect selection ofMFs/Schemes and types of investors.

Segmentation of investor groups involves identifying homogenous groups of investors who behavedifferently according to their characteristics. The risk capacity of an investor also needs to be understoodthoroughly for classifying investors groups. This categorization provides us with an important piece ofinformation, regarding individual’ s eagerness towards identifying those fund qualities that influenceMF/Scheme selection. The survey asked the investors to rate their current attitude towards the riskyFinancial Instruments, Shares, on a 5-point Likert Scale where 5= Highly Favourable to 1 = Not At AllFavourable. Considering their current attitude, the investors were grouped into 5 types based on theirRisk profile and Expectations. Table 6.2 gives the classification of Investor groups.

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Table 6.2Classification of Investor Groups

Investor Types Risk Profile ExpectationsProfessional Takes Necessary Risks Maximum ReturnAmbitious Highly Risk Taking High Short Term ReturnsModerate Comfortable Levels of Risk Good, Steady Return

Conservative Risk Averse Regular Income rather than Capital GainsCautious Extremely Risk Averse Minimum Return/ Capital Preservation

To classify the large number of Fund Qualities into smaller number of factors with common constructs,Factor Analysis using Principal Component Analysis was applied. 7 Principal Components out of 25fund qualities were extracted and subsequently named. Results of PCA- Identification of factors thataffect MF/Scheme selection is given in Table 6.1. An important part of Factor Analysis is to generateFactor scores for each case or individual survey respondent. Factor/ Component scores reflect theimportance or otherwise of each component to each respondent. In the present study Anderson-Rubin (A-R) Factor scores were obtained for each respondent, for each of the 7 extracted principal factors. The A-R method of deriving Factor scores generates uncorrelated scores with zero mean and unit standarddeviation.

MLR technique was employed to seek a relationship between the Factor scores and types of investors, toindicate statistically important factors that influence the Fund selection behaviour of different types ofinvestors. The latter acted as the dependent variable in the regression procedure and factor scores werethe independent variable. The types of investors, in this study constitute a categorical dependent variable.MLR is specially designed for situations in which the dependent variable is categorical or discrete innature. Given the 5 categorizations for the dependent variable, MLR is simply a polychotonomousextension of the widely applied dichotonomous logistic regression model. Additionally, MLR permitsindependent variables that may be factors or covariates. The covariates must be continuous and that is thecase for the survey respondents A-R Factor scores. Analysis of MLR indicated that, in the order ofimportance, Principal Factors 5, 3, 4 and 7 (Table 6.3) are the only statistically significant componentsthat influence an investor’ s selection of MFs/Schemes.

Table 6.3Multinomial Logistic Regression Analysis,

Fund Qualities Affecting MF/Scheme Selection vs. Types of Investors

Model Fitting Information

255.646197.509 58.137 28 .001

ModelIntercept OnlyFinal

-2 LogLikelihood Chi-Square df Sig.

Pseudo R-Square

.441

.478

.227

Cox and SnellNagelkerkeMcFadden

Likelihood Ratio Tests

Effect -2 Log Likelihood ofReduced Model

Chi - square df Sig.

Intercept 262.006 64.497 4 .000Factor 5Competent Performance

211.152 13.643 4 .009

Factor 3Flexible Investment Facilities

210.322 12.813 4 .012

Factor 4Reputation

208.718 11.209 4 .024

Factor 7Fringe benefits / Tangibles

206.181 8.672 4 .050

df = degrees of freedom Sig. = Significance

13

Classification

2 0 2 1 0 40.0%0 1 0 1 0 50.0%0 0 22 10 3 62.9%0 0 5 29 5 74.4%0 0 7 6 6 31.6%

2.0% 1.0% 36.0% 47.0% 14.0% 60.0%

Observed1.002.003.004.005.00Overall Percentage

1.00 2.00 3.00 4.00 5.00PercentCorrect

Predicted

Interpretation of Significance Tests:

‘Likelihood’ is a probability, specifically the probability that the observed values of the dependent maybe predicted from the observed values of the independent. The log likelihood is its log and varies from 0to minus infinity.

In the SPSS output for MLR analysis, Log Likelihood Tests appear as ‘ Sig’ in the ‘ Final’ row in the‘ Model Fitting Information’ . A well fitting model is significant at .05 levels or lesser than that. In thisstudy, the ‘ Sig’ value in the ‘ Final’ row in the ‘ Model Fitting Information’ is .001, which proves theanalysis to be a well fitting model. The chi-square statistic is the difference in -2 log-likelihood betweenthe final model and a reduced model. Omitting an effect from the final model forms the reduced model.The null hypothesis is that all parameters of that effect are 0. Cox/Snell, Nagelkerke and Mcfaddenpsuedo (r2) co-efficient are 44.1%, 47.8% & 22.7%. If the chi-square statistic shows a small p value (p<=0.05), it is assumed a good model fit. In the present study; Factor 5, “ Competent Performance”;Factor 3, “Flexible Investment Facilities” ; Factor 4, “Reputation” and Factor 7, “Fringe Benefits” haveproved significant among other extracted factors, their p value being <= 0.05.Therefore, the outcomes of the MLR analysis, allows the AMCs to identify which combination ofvariables have significant influence on the Fund selection behaviour of investors. The AMC can thenapply this knowledge for developing marketing strategies for all types of investors, present and potential,and also identify significant drivers that govern an investors’ selection to MFs/Schemes.

Hence, the largest gap between investor expectations and service delivery can be bridged with competentperformance, flexible investment opportunities, reputation and fringe benefits or tangibles, if provided bythe AMC. The 21st century investors look for value added services i.e. personalized attention, tailor-madeinvestment packages, skills and infrastructure for understanding the needs of a common investor ratherthan plain vanilla products. A key question to the marketing managers of MFs is whether they shouldconcentrate on fund qualities considered commonly important by investors or the dimensions that drivesatisfaction? In the words of Morgan Stanley Dean Witter4; “In the end, not all Asset Management(Mutual Funds) Companies will survive, (but) for firms that have built a ‘ culture of excellence’ over theyears, have segmented their customers efficiently, built brand and delivered performance, the ongoingopportunities to take market share have never been more significant” .

7. PRINCIPAL SUGGESTIONS

• Since the investors need for liquidity is found to be high, we suggest that more of the newschemes opening for subscription be Open-ended.

• AMCs should continuously design suitable schemes to meet the triple needs of adequate returns,safety and liquidity in a balanced proportion and develop infrastructure to reach to the investors.They should also simplify the operational environment. AMCs should open more investorservice branches or arrange with other banks to provide over-the-counter redemption facilityacross the country through their banking network.

• Mutual fund companies should segment their target customers and position their variousproducts based on the target segment they propose to address. The target segment can bebroadly divided into institutional segment and individual investor segment. The institutionalsegment consisted of treasury departments of Corporate, Trusts etc and suitable products such as

14

Institutional Income schemes and Money Market schemes can be targeted at them. Theindividual investor can be in turn divided into various segments such as Young Families withsmall or no children, Middle-aged People saving for retirement and Retired People looking forsteady income. Suitable products such as Growth and Balanced schemes for young families andIncome schemes with sure and steady returns for retired people can be marketed. By propersegmentation and by targeting the right product to the right customer, Mutual Fund companiescan hope to win the confidence of their customers and 'own' them for a lifetime.

• The mutual fund industry in India is constrained by law from offering full-fledged pension planson the lines of the 401 K plans, a popular MF product available in the United States. Funds likeUTI and Kothari Pioneer are some of the mutual funds offering full-fledged Pension Plans withbenefit under Section 88. While UTI offers Retirement Benefit Plan, Kothari Pioneer MutualFund offers KP Pension Plan. Retirement schemes similar to 401K plan will attract a largenumber of small investors who seek regular income after retirement.

• The average projected life span of an Indian after retirement (that is, after 60) is expected to goup from 15 years to 20 years. And the number of the elderly (those over 60) is expected toincrease significantly from 6.8 per cent of the population in 1991 to 8.9 per cent in 2016 andfurther to 13.3 per cent by 2026. One of the key recommendations of the expert committee ofProject OASIS (Old Age Social and Income Security) constituted by the government on pensionreforms in 1999 is the creation of a privately managed, individual choice based, voluntaryPension system. Pension funds are likely to be a big driver for the MF industry.

• AMC/AMFI/SPONSORS should effectively convey the message that among the multitude ofinvestment options available, MFs are better geared to offer the balanced mix of return, safetyand liquidity to the investors. Negative perceptions about MFs require to be tackled throughappropriate investor education measures. It is suggested that AMFI may set aside a percentageof membership fee that it collects from the AMCs and create a fund for Investor EducationProgrammes. AMC/AMFI/SPONSORS should develop investor education literature speciallytailored to suit the regional needs to create/increase the awareness level of the investors.

• Employers can influence the investment decision of the employees by providing financialeducation as a benefit to employees. Employers can be objective in hiring an independentfinancial advisor to conduct an education programme on long-term investment strategies.Employers have ready access to employees and the cost can be spread over many employees.

• Advisory services are becoming more critical to investors and independent financial advisorsand planners are gaining ground. The US accreditation body for Financial Planners was set up inDelhi in the name of Association of Financial Planners (AFP) and soon professional CertifiedFinancial Planners (CFPs) will be available to investors to assist them in their financial planningneeds. Banks are planning to enter into advisory services in a big way. An entirely newdistribution channel can be created consisting of professional advisors who will exert substantialinfluence on what products investors will buy.

• E-commerce is gradually showing signs of gaining acceptance and electronic sale of financialproducts is especially gaining volumes. There is a likelihood of the volumes reaching asignificant size, thereby spawning a new distribution paradigm. Therefore AMCs shouldestablish friendlier and easily accessible ‘ Automated Response Systems’ . These systems shouldnot only effectively convey information on products and services but also efficiently redressinvestor grievances.

• Funds should also induce technology that reduces the turnaround time for services likeinvestments, redemptions and transfers and bring them on par with banks in turnaround time.

Suggestions for Further Research:

• The MF operational environment is becoming more competitive. Hence, the impact of emergingcompetition on investor behaviour/behavioural changes needs to be studied further.

15

• Developments in technology influence the behaviour of investors. Hence, the impact oftechnology on financial behaviour is another potential area for close study.

• Since the industry is still struggling to win the investors’ confidence, an in-depth analysis intoinvestor’ s expectations from MF products, its performance, management, service and otherrelated areas could be done.

• A study is required to examine the trading behaviour of MF investors. Further research can bedone to identify whether MF investors chase past returns or employ a current performancemomentum to pick up their funds i.e. whether they are active or passive trend chasers.

• This study reveals that MF investors feel that currently the two major benefits, which MFspurport to offer, namely, diversification benefits and professional management are notsatisfactorily delivered. In spite of this, MF industry is growing and we attribute this to investorbehaviour and other macroeconomic factors. Further research can be done to understand thereasons for growing popularity on one side and the struggle to win investors’ confidence on theother side.

8. CONCLUSIONS

THE emergence of an array of savings and investment options and the dramatic increase in the secondarymarket for financial assets in the recent years in India has opened up an entirely new area of valuecreation and management. An average Indian investor is a greenhorn when it comes to financial markets,the causes may be many: the lack of opportunity, lack of conceptual understanding and the influence of afixed-income orientation in the Indian culture. Salaried person's savings are most often deposited inmutual funds; the theory behind this is that by pooling together a huge aggregation of individual savingsand investing them, using the professional judgment of the fund manager, one spreads risk, takesadvantage of volume buying and scientific data analysis, expertise and so on. Therefore it is seen as theideal option for an individual who does not have the time, knowledge or experience to make a successionof judgments involving his hard-earned savings. MF industry in India has a large untapped market inurban areas besides the virgin markets in semi-urban and rural areas. This market potential can be tappedby scrutinizing investor behaviour to identify their expectations and articulate investor's own situationand risk preference and then apply to an investment strategy that combines the usual four: cash andequivalents, Government-backed bonds, debt, and equity.

Presently, more and more funds are entering the industry and their survival depends on strategicmarketing choices of mutual fund companies, to survive and thrive in this highly promising industry, inthe face of such cutthroat competition. In addition, the availability of more savings instruments withvaried risk-return combination would make the investors more alert and choosy. Running a successfulMF requires complete understanding of the peculiarities of the Indian Stock Market and also the psycheof the small investor. Under such a situation, the present exploratory study is an attempt to understandthe financial behaviour of MF investors in connection with scheme preference and selection.

Studies similar to this, if conducted on a large scale at regular intervals by organizations likeAMFI/SEBI, will help capture the changing perceptions and responses of these groups, and thus provideearly warning signals to enable implementation of timely corrective measures. It is hoped that the surveyfindings of the study will have some useful managerial implications for the AMCs in their productdesigning, marketing and management of the fund. Results of the study may help in making costeffective strategic decisions and hence would be of interest to both existing and new MFs; Fundmanagers; and individual investors.

In the words of Morgan Stanley Dean Witter4, "In the end, not all asset management (mutual fund)companies will survive, [but] for firms that have built a 'culture of excellence' over the years, havesegmented their customers efficiently, built brand, and delivered performance, the ongoingopportunities to take market share have never been more significant."

***********

16

Annex I

QUESTIONNAIRE TO PRESENT INVESTORS IN MUTUAL FUNDS

Dear Sir / Madam,

Mutual funds have opened new vistas to millions of small investors by virtually taking investment totheir very doorstep. The scientific investment approach and investor oriented benefits has made theindustry grow to $7.4 trillion by year end 2003.

I am currently engaged in a study on Investors attitude towards Mutual Funds .In this connection Irequest You to read the following items carefully and answer them. The answers your give will be heldconfidential and used purely for academic purpose. Please put a tick mark in the square 5corresponding your choice. I thank you for your time.

PART A: Personal Data

1.1) Name (Optional) :

1.2) Sex : Male 5 Female 5

1.3) Age in completed years:

Below 30 5 31 – 40 5 41 – 50 5 Above 50 5

1.4) Academic Qualifications:

School Final 5 Graduate 5 Post – Graduate 5 Professional Degree5

1.5) Marital Status:

Married 5 Unmarried 5 Widow 5 Widower 5 Divorced 5

1.6) Occupation:

Professional 5 Business 5 Salaried 5 Retired 5

1.7) Annual Income in Rs:

Below Rs 1, 00, 000 5 Rs1, 00,001 – 3, 00,000 5Rs 3, 00,001–5, 00,000 5 Above Rs 5, 00,000 5

1.8) How much do you save annually (in Rs. Approx)

Less than Rs 50,000 5 Rs 50,001 to Rs 100000 5 Above Rs 100000 5

1.9) Objectives of your savings are :

To provide for Retirement 5 For tax reduction 5To meet contingencies 5 For children’ s education 5For purchase of assets 5

1.10) What is your current preference of savings avenue? (Rank from 1 first preference to 10last preference)

Currency 5 Bank Deposit 5Life Insurance 5 Pension & Provident Fund 5Shares 5 Units of UTI & Mutual funds 5Postal Savings 5 Chits 5Real Estate 5 Gold 5

PART B: Please read the following and give your views:

2.1) What is your current attitude towards the following Financial Instruments, in the Indian CapitalMarket?

HighlyFavourable

Favourable Some whatfavourable

Not veryfavourable

Not at allfavourable

a) Shares 5 5 5 5 5

17

b) Debentures 5 5 5 5 5

c) Mutual Funds 5 5 5 5 5

d) Bonds 5 5 5 5 5

2.2) Do you prefer investment in Mutual funds to other savings avenue in future?

Yes5 No5 Not Sure5

2.3) Generally you prefer (Please Rank from 1 first preference to 6 last preference)

Growth schemes 5 Income Schemes 5Balanced Schemes 5 Money Market Schemes 5Tax saving Schemes 5 Index Schemes 5

2.4) You prefer:

Open ended Schemes 5 Close Ended Schemes 5Interval Schemes 5

2.5) You prefer investment in Mutual funds due to (Rank from 1 to 8 down)

Safety 5 Liquidity 5Flexibility 5 Good Return 5Capital appreciation 5 Professional Management 5Tax Benefit 5 Diversification Benefit 5

2.6) There are many qualities that could affect your selection of Mutual funds and Specific Schemes.Please indicate importance of the following in your decision.

HighlyImportant

ImportantSome whatImportant

Not veryImportant

Not at allImportant

I. Fund Related Qualitiesa) Fund performance record 5 5 5 5 5

b) Funds reputation or brand

name5 5 5 5 5

c) Scheme’ s expense ratio 5 5 5 5 5

d) Scheme’ s portfolio of

investment5 5 5 5 5

e) Reputation of the Fund

Manager/ Scheme5 5 5 5 5

f) Withdrawal facilities 5 5 5 5 5

g) Favourable rating by a

rating agency5 5 5 5 5

h) Innovativeness of the

scheme5 5 5 5 5

i) Products with tax benefits 5 5 5 5 5

j) Entry & Exit load 5 5 5 5 5

k) Minimum initial investment 5 5 5 5 5

II Fund Sponsor Qualitiesa) Reputation of sponsoring

firm5 5 5 5 5

18

HighlyImportant

Important Some whatImportant

Not veryImportant

Not at allImportant

b) Sponsor has a recognized

brand name 5 5 5 5 5

c) Sponsor has a well

developed agency &

network

5 5 5 5 5

d) Sponsor’ s expertise in

managing money5 5 5 5 5

e) Sponsor has a well

developed research &

infrastructure

5 5 5 5 5

f) Sponsor’ s past performance

in terms of risk and return5 5 5 5 5

III Investor Related Servicesa) Disclosure of investment

objective in the

advertisement

5 5 5 5 5

b) Disclosure of periodicity of

valuation in the

advertisement

5 5 5 5 5

c) Disclosure of the method

and the periodicity of the

schemes sales and

repurchases in the offer

documents

5 5 5 5 5

d) Disclosure of NAV on every

trading day5 5 5 5 5

e) Disclosure of deviation of

investments from the

original pattern

5 5 5 5 5

f) MF’ s Investor’ s grievance

redressal machinery 5 5 5 5 5

g) Fringe benefits i.e., free

insurance, credit cards,

loans on collateral, tax

benefits etc.

5 5 5 5 5

h) Preferred MF to avoid

problems, i.e., bad

deliveries, and

unnecessary follow up with

brokers and companies.

5 5 5 5 5

2.7) How did you come to know about Mutual fund investment schemes?

Reference groups ---------------Newspapers (general) ---------------Newspapers (business) ---------------

19

Financial Magazines ---------------Television ---------------Brokers / Agents ---------------Mail ---------------Stores Display ---------------

2.8) While contacting the fund or trying to get routine / special information would you rathercommunicate with a computerized automated response system or a person. (Please tick oneresponse).

I prefer automated response 5I prefer to personally visit the office 5I prefer to telephone the office 5I have no preferences 5

2.9) Do you think Mutual fund investing is a best alternative to equity investing?

Yes 5 No5 Do not know 5

2.10) Name a few Mutual funds existing in the Indian capital Market at present, you know

1)2)3)4)

PART C: Please read the following statements and indicate your views by putting a tick markin the appropriate square

Yes No Do Notknow

3.1) Investment in M F helps you realize the benefits of stock Marketinvesting.

5 5 5

3.2) M F investing gives a definite positive return. 5 5 5

3.3) Return of the Principal amount invested in any MF is assured.5 5 5

3.4) MF returns and Principal are fully protected and guaranteed byAssociation of Mutual funds (AMFI)

5 5 5

3.5) Bank sponsored Mutual funds give a definite positive return whichis greater than Bank fixed deposits rate for a similar period

5 5 5

3.6) Entry and exit out of Mutual funds is easy 5 5 5

3.7) Due to professional investment, a good return can be expected ofMutual fund

5 5 5

3.8) Ups and downs of stock Market will not affect the return from MF. 5 5 5

3.9) There are many MF schemes to meet the varied needs ofinvestors.

5 5 5

3.10) AMFI protects the interests of MF industry and the unit holders. 5 5 5

Thank you very much for your kind co-operation and for taking time to complete this Questionnaire.

20

ANNEX II

Table A 2.1Distribution of Individual Investors by Demographic Factors

Number of RespondentsInvestor Particulars

Total (100) (%)

Male 84 84Sex

Female 16 16

Below 30 27 27

30 – 40 27 27

41 – 50 20 20

Age

Above 50 26 26

School final 11 11

Graduate 37 37

Post Graduate 20 20

AcademicQualifications

Professional 32 32

Married* 77 77Marital Status

Unmarried 23 23

Professional 12 12

Business 3 3

Salaried 77 77

Occupation

Retired 8 8

Below Rs.1,00,000 7 7

Rs.1,00,000 – Rs.3,00,000 50 50

Rs.3,00,000 – Rs.5,00,000 28 28

Annual Income

Above Rs.5,00,000 15 15

Less than Rs.50,000 40 40

Rs.50,001 – Rs.1,00,000 43 43

Annual Savings

Above Rs.1,00,000 17 17

Source: Field Survey * includes one widower

21

REFERENCES

A. BOOKS:Atmaramani, “Restoring Investor Confidence”, The Hindu Survey of Indian Industry, 435-437, 1996.Festinger, L., A Theory of Cognitive Dissonance, Stanford University Press, Stanford CA, 1957.Goetzman, W.N., “Cognitive Dissonance and Mutual Fund Investors” , Working Paper, ColumbiaBusiness School, 1993.

Gupta, L.C., Mutual Funds and Asset Preference, Society for Capital Market Research andDevelopment, Delhi, 1994.

Kiran D. and Rao U.S., “ Identifying Investor Group Segments Based on Demographic andPsychographic Characteristics” , MBA Project Report, Sri Sathya Sai Institute of Higher Learning, 2004.Madhusudan V. Jambodekar, Marketing Strategies of Mutual Funds – Current Practices and FutureDirections, Working Paper, UTI – IIMB Centre for Capital Markets Education and Research, Bangalore,1996.Naresh K. Malhotra., Marketing Research – An Applied Orientation, Prentice Hall International, USA,1999, 585 –597.Rajeshwari T.R and Rama Moorthy V.E., Performance Evaluation Of selected Mutual Funds andInvestor Behaviour, PhD Thesis, Sri Sathya Sai Institute of Higher Learning, Prasanthinilayam, 2002.Syama Sundar, P.V., 1998, “Growth Prospects of Mutual Funds and Investor perception with specialreference to Kothari Pioneer Mutual Fund” , Project Report, Sri Srinivas Vidya Parishad, AndhraUniversity, Visakhapatnam.Sadhak, H., Mutual Funds in India – Marketing Strategies and Investment Practices, Response Books,New Delhi,1997, 63 – 64.SEBI – NCAER, Survey of Indian Investors, SEBI, Mumbai, 2000.Vidya Shankar, S., “Mutual Funds – Emerging Trends in India”, Chartered Secretary, Vol.20, No.8,1990, 639-640.

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C. WEBSITES:“AMFI-Mutual fund industry”, < http://www.amfiindia.com/mutualind.html 12/12/2004.“ Investor Home- Psychology and Behavioural Finance” , 17/5/99, Investor Home Online <http://www.investorhome.com/psych.htm , 21/12/2004.Nofsinger John R., “Does Investor Sophistication Influence Investing Behaviour and TradingPerformance? Evidence from China”, [email protected] , 23/11/2004.Ramachander, S., “Needed: A savings behaviour model” , 30/9/2004, The Hindu Business line <http://www.thehindubusinessline.com, 27/10/2004“The golden nest egg – What’ s the right investment mix for you?”, 13/9/2004, Online<http://www.personalfn.com ,27/11/2004.“The SEBI-NCAER investor survey”, 28/8/2000, The Rediff Money Special <http://www.rediff.com/money/2000/aug/28spec.htm, 2/11/2004.Tripathy Nalini P.,”Mutual funds in India- A Financial Service in Capital Markets” , Online <http://www.iif.edu/data/fi/journal/FI101/FI101Art6.pdf, 20/12/2004.

Author Profile:Kavitha Ranganathan earned her M.Phil in Commerce from Madurai Kamaraj University.M.Com from Mumbai University and B.Com (Hons.) from Sri Sathya Sai Institute of Higher Learning.