REVIEW OF LITERATURE

A Literature review is a body of text that aims to review the critical points of current knowledge on a particular topic. Most often associated with science-oriented literature, such as a thesis, the literature review usually precedes a research proposal, methodology and results section. Its ultimate goal is to bring the reader up to date with current literature on a topic and forms the basis for another goal, such as the justification for future research in the area.

A good literature review is characterized by: a logical flow of ideas; current and relevant references with consistent, appropriate referencing style; proper use of terminology; and an unbiased and comprehensive view of the previous research on the topic.

Here we discuss on different reviews related to the following:

2.1 2.2

Investors and Investment Mutual funds 2.2.1 Systematic Investment Plan

2.3 NAV 2.4 Investors Attitude towards Mutual Funds.

2.1 Investors and Investments

Investors in emerging markets say that they look at market volatility as a good opportunity to increase the level of risk in their portfolio. On the other hand those in the developed markets say that volatility would make them go for an increased allocation in cash and exercise increased caution with regard to investment. Investors increasing allocation of cash is not because their ability to bear that risk has been impacted, says Bansal. [1]

JOHN C. BOGLE [2] the former CEO of Vangaurd Group Of Mutual Funds, in his article Six Lessons for Investors - Be diversified and don't assume past performance will continue on Jan 08, 2009 says, There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons: 1) Beware of market forecasts, even by experts. 2) Never underrate the importance of asset allocation. 3) Mutual funds with superior performance records often falter. 4) Owning the market remains the strategy of choice. 5) Look before you leap into alternative asset classes. 6) Beware of financial innovation.

Investment is the employment of funds with the aim of achieving additional income or growth in value. The essential quality of an investment is that it involves waiting for a reward. The term investment does not appear to be simple as it has been defined. Investment is the allocation of monetary resources to assets that are expected to yield or positive return over a given period of time says Preeti Singh. [3]

2.2 Mutual Funds

Mutual Fund schemes are witnessing an increasing amount of innovation as funds try to ensure that their offerings caver a wide variety of options. This translates into an increasing array of schemes on offer for investors. However a large choice often means more confusion for investors. [1]

Mutual Funds are perhaps the only segment in the financial services businesses where the private sector has grown to dominate. Several innovations, efficiencies and technological improvements can be attributed to the incentives these players had, to differentiate themselves. [2]

Mutual Funds disclose the entire portfolio, a practice not followed in many markets. Fund managers would ideally like to build up their positions, before letting the world know what they are buying. In terms of transparency and disclosure the mutual fund industry has indeed taken a big leap in the last 10 years. [3] Mutual Funds have been gaining lot of importance in the Indian Capital Market arena from the time of launch. The growth envisioned in the Mutual Fund Industry has made the Central Government keep a close watch on the issues pertaining to the mutual fund industry. In this process the various governments have brought in regulations as regard to Mutual Funds in the Budgets says Pradeep Kumar S and Murugavel A. [4] India's mutual fund industry is one of the brightest spots in an already fast-growing domestic financial sector.Assets under management have swollen in the past year by almost 60 per cent to more than Rs5,379bn ($137bn) as the country's once-conservative retail investors have been attracted to equities by new highs on the stock market says Joe Leahy, Andrew Hill and Paul Betts. [5] Mutual Funds are increasingly gaining popularity among the Indian investors and have become the much sought after investment option, a latest Nielsen survey says. According to a survey conducted by global media and information company Nielsen, as much as 90 per cent of investors parked their funds in mutual funds last year, raising the share of MF investments in the overall portfolios to 40 per cent from 34 per cent previously. Interestingly, the profile of investors in mutual funds has been falling into a younger category with males in their mid-30s

investing more in them, compared to those in their 40s, the 'Nielsen Mutual Fund Brand Health Monitor 4' survey stated. "The marketing efforts of Mutual Fund AMCs (Asset Management Companies), coupled with the media coverage the sector has enjoyed, have contributed to their increasing popularity as an investment option," The Nielsen Company Associate Director Customized Research Kalyan Karmakar said. The high returns and ease of operating in the equity market take precedence over tax benefits as the key reasons for investing in a mutual fund. Even with the drop in Sensex, equity funds at 53 per cent have the highest share of future mutual fund investments, the survey revealed. "We are now seeing a change in mindset, where investors previously regarded Mutual Funds as a tax saving option but are now buying them in the hope of greater financial return as a result of the whopping rise in Sensex bringing greater profit to many investors last year," Karmarkar added. [6] We note that there is a common tendency amongst insurance companies to not just protect clients from risks to their lives, health, and assets, but also to manage clients investments. Insurers do this through unit-linked insurance plans (ULIPs). Insurers profitability today depends largely on attracting investments in the garb of life cover. ULIPs turn out very expensive for investors, especially for terms shorter than 10 years. ULIPs when compared with mutual funds differ on liquidity, tax efficiency, and expenses. Broadly speaking, we can say that mutual funds offer better advantages in terms of investment says Mr. Sameer Kamdar the Country Head, Mutual Funds, Mata Securities in his article Mutual Funds offer investors more flexibility. [7] Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because all the stocks do not decline at the same time and in the same proportion. This diversification through an MF is achieved with far less money than one can be on his own. Top-performing MF schemes have produced good returns, which a naive investor rarely achieves in course of direct stock-market trading. Not everyone has the skill, knowledge and time to plan his/her investments. The easier way out is to select the right MF and transfer the entire responsibility of managing the money to the fund manager. Thus they can avail of services of experienced and skilled professionals who are backed by a dedicated investment research team. Today, Mutual Funds provide an attractive and simple way of tapping the potential of various investment options like equity, debt and money market instruments. If

you are unsure about the equity markets this year, you can simply move to a debt fund or an MIP.Indian markets have the potential over the long run, while it might not be a good bet for the short term. There are chances of continued volatility agues the Park Financial Advisors. It is advisable to spread out the investments rather than lump-sum ones. Here again, the MF proves to be beneficial since they provide features like systematic investment/transfer plans. Investment at regular intervals helps to average out the cost of purchase. [8]

The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. [9]

According to the Global Asset Management 2006 Report form Boston Consulting Group, India-managed assets will exceed more than $1 trillion by 2015. This means an annual growth rate of 21% for the next nine years. The Indian mutual funds industry has been growing at a healthy pace of 16.68 per cent for the past eight years and the trend will move further as has been emphasized by the report. With the entrance of new fund houses and the introduction of new funds into the market, investors are now being presented with a broad array of Mutual Fund choices. The total asset under management of Mutual Fund industry rose by 9.45% from Rs.309953.04 crores to 339232.46 crores in November, 2006 as published by AMFI. In 1987, its size was Rs.1,000 crores, which went up to Rs. 4,100 crores in 1991 and subsequently touched a figure of Rs.72,000 crores in 1998. Since then this figure has been increasing tremendously and thus revealing the efficiency of growth in the mutual fund industry. [10]

2.2.1 SIP (Systematic Investment Plan) SIP is a good Habit. SIP is a smart way to create wealth. It doesnt demand lump sum

investments. Just a little, every month will do. With SIP, one need not time the market. And over a long period, ones investment averages out the market highs and lows. Hence one buys more units when the market is low and less when the market is high. SIP is truly small on savings and big on benefits says the CEO of Kotak Mutual Funds. [12]

By Systematic Investment Plan one can invest a pre-determined amount of money in chosen schemes at the applicable NAV based Sale Price on each transaction date. Each transaction will fetch some additional units that will be added to the investment account.

Power of compounding: By extending the investment period one can earn profit, and accumulate more wealth. [13] When one buys the units of a fund, they may do so when the NAV is really high. For instance, let's say if they bought the units of a fund when the bull run was at its peak, leading to a high NAV. If the market dips after then, the value of the investments falls and he/she may have to wait for a long while to make a return on their investment. But, if one invest via a SIP, they dont commit the error of buying units when the market is at its peak. Since they are buying small amounts continuously, their investment will average out over a period of time. They will end up buying some units at a high cost and some units a lower price. Over time, their chances of making a profit are much higher when compared to an one-time investment says Rachana. [14] Kairav Shah in his article Investing in Mutual Funds says SIP or Systematic Investment Plan is a great way to discipline oneself as it purchases mutual fund units every month at a predetermined date and amount. One can invest as low as Rs 500 through post-dated cheques or by instructing their bank for an ECS. Here are some of the benefits of SIP:

No need to time the market: It is a very difficult task to judge the right time to pump in their money in the market. And thats where SIP helps. SIP is for those who fear to invest in equities at the right time. SIP helps your fund grow by the power of compounding.

Rupee-cost averaging: Since the investments are evenly spread, ones money buys lesser units when the market is high and more units when the market is low. This helps bring down the average cost per unit and helps investors benefit from market volatility.

Low cost of investment: With the monthly contribution being as low as Rs 1,000, investors can easily start saving and investing without altering their present budget in a big way. They'll be able to earn a substantial corpus on a small monthly investment in the short-term or on a medium-term basis.

Liquidity: The liquidity of SIPs adds to its beauty. One can easily get their money in a short timeframe. The trade cycle of equity related SIPs is T+3 days and that of debt and liquid related SIPs is T+1 day. [15]

SIP is a way of investing specifically designed for those who are interested in building wealth over a long-term and plan out a better future for themselves and their family. It is useful for those who want to get their investments going, but don't have a large sum of money to invest. Sharma aptly sums it up, "In developing economies like India, where securities markets (equities and fixed income instruments) can be volatile and it is rarely possible to time the markets and predict the future. We can seldom accurately predict when a particular stock will move up or where the interest rates are headed." He says, "Systematic Investment Plan makes the volatility of the securities markets work in your favor. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always be less than the average sale price per unit, irrespective of the market rising, falling, or fluctuating. This concept is called Rupee Cost Averaging (RCA)." [16]

SIP is an investment option that is presently available only with mutual funds. The other investment option comparable to SIPs is the recurring deposit schemes from Post office and banks. Basically, under an SIP option an investor commits making a regular (monthly) investment in a particular mutual fund/deposit. Investing in SIPs is also known as Rupee cost averaging. The advantage of rupee cost averaging is that the Net asset value (NAV) is averaged out, as the investor will be entering the fund at different NAVs, which may be higher or lower depending on the market condition. An investor who is not having a lump-sum amount to invest and also does not want to take much risk on his investment should always select a Systematic Investment Plan option. This will enable him to invest regularly i.e. improve investing

discipline. Also, the investor stands to benefit from rupee cost averaging. [17]

2.3 NAV NAV is the single most widely talked about figure or indicator when reviewing mutual funds. At one level a simple ratio, it can, however, conceal as much as it reveals. In order to calculate the NAV of a scheme, each asset and liability of the scheme needs to be valued.

Nav = value of all assets minus value of liabilities other than to unit-holders. It can also be calculated as: Unit capital plus reserves. There is a significant element of subjectivity in the valuation of assets. SEBI, through its valuation norms, has been trying to ensure some degree of standardization in the manner in which different AMCs handle this subjectivity. [18]

2.4 ATTITUDES TOWARD MUTUAL FUNDS

A strong majority of current fund owners have positive attitudes toward funds, even though they realize owning funds carries risks and may not always be profitable. In contrast, those who either owned funds in the past but do not now or who indicate they do not ever expect to own funds have far less positive attitudes toward funds. In particular, they are far less likely to view funds as safe or profitable. Those who do not own funds but expect to do so in the future have attitudes toward funds that are neither as positive as those of current owners nor as negative as those of other non-owners.

This part tries to review the literature available on the mutual funds scheme in India and abroad. The existing studies on Investment patterns of investors are very few and very little information is available about investor perceptions, preferences, attitudes and behavior. As far as

the mutual funds are concerned, there are hardly few studies undertaken earlier. All efforts in this direction are fragmented. In spite of this limitation, a few of the parallel and related studies are reviewed here under.

De Bond and Thaler (1985) while investigating the possible psychological basis for investor behavior, argue that mean reversion in stock prices is an evidence of investor over reaction where investors over emphasize recent firm performance in forming future expectations of the investment. [19]

Nalini and Sasikumar studied about the mutual funds in India. The main objectives of the study were to analyze how the mutual fund schemes help to mobilize savings from the household sector. Mutual funds have now made their presence felt in Indian financial market by mobilizing the savings of household and corporate sectors and deploying the same in the market. The period of study was 1987 91. During this period, the share of mutual funds in the household financial savings rose from 2.3%to 3.5% and estimates showed that more than 5.6% of the total financial savings of the Indian public were invested in mutual funds. [20]

Gupta (1994) made a household investor survey with the objective to provide data on the investor preferences on MFs and other financial assets. The findings of the study were more appropriate, at that time, to the policy makers and mutual funds to design the financial products for the future. [21]

Madhusudhan Vs Jambodekar (1996) conducted a study to assess the awareness of MFs among investors, to identify the information sources influencing the buying decision and the factors influencing the choice of a particular fund. The study reveals among other things that Income Schemes and Open Ended Schemes are more preferred than Growth Schemes and Close Ended Schemes during the then prevalent market conditions. Investors look for safety of Principal, Liquidity and Capital appreciation in the order of importance; Newspapers and Magazines are the first source of information through which investors get to know about MFs/Schemes and investor service is a major differentiating factor in the selection of Mutual Fund Schemes. [22]

Syama Sunder (1998) conducted a survey to get an insight into the mutual fund operations of private institutions with special reference to Kothari Pioneer. The survey revealed that awareness about Mutual Fund concept was poor during that time in small cities. Agents play a vital role in spreading the Mutual Fund culture; open-end schemes were much preferred then; age and income are the two important determinants in the selection of the fund/scheme; brand image and return are the prime considerations while investing in any Mutual Fund. [23]

Ippolito (1992) says that fund/scheme selection by investors is based on past performance of the funds and money flows into winning funds more rapidly than they flow out of losing funds. [24]

Shanmugham (2000) conducted a survey of 201 individual investors to study the information sourcing by investors, their perceptions of various investment strategy dimensions and the factors motivating share investment decisions, and reports that among the various factors, psychological and sociological factors dominated the economic factors in share investment decisions. [25]

In India, one of the earliest attempts was made by NCAER in 1964 when a survey of households was undertaken to understand the attitude towards and motivation for saving of individuals. Another NCAER study in 1996 analysed the structure of the capital market and presented the views and attitudes of individual shareholders. SEBI NCAER Survey (2000) was carried out to estimate the number of households and the population of individual investors, their economic and demographic profile, portfolio size, investment preference for equity as well as other savings instruments. This is a unique and comprehensive study of Indian Investors, for, data was collected from 3,00,0000 geographically dispersed rural and urban households. Some of the relevant findings of the study are : Households preference for instruments match their risk perception; Bank Deposit has an appeal across all income class; 43% of the non-investor households equivalent to around 60 million households (estimated) apparently lack awareness about stock markets; and, compared with low income groups, the higher income groups have higher share of investments in Mutual Funds (MFs) signifying that MFs have still not become

truly the investment vehicle for small investors. Nevertheless, the study predicts that in the next two years (i.e., 2000 hence) the investment of households in Mutual Funds is likely to increase. We have to wait and watch the investors reaction to the July 2nd 2001, great fall of the Big Brother, UTI. (Note: Behavior is a reaction to a situation. So as situation changes, behavior gets modified. Hence, findings and predictions of behavior studies should be viewed accordingly). [26]

Goetzman (1997) states that there is evidence that investor psychology affect Fund/scheme selection and switching. [27]

Anjan Chakarabarti and Harsh Rungta (2000) stressed the importance of brand effect in determining the competitive position of the AMCs. Their study reveals that brand image factor, though cannot be easily captured by computable performance measures, influences the investors perception and hence his fund/scheme selection. [28]

Shankar (1996) points out that the Indian investors do view Mutual Funds as commodity products and AMCs, to capture the market should follow the consumer product distribution model. Since 1986, a number of articles and brief essays have been published in financial dailies, periodicals, professional and research journals, explaining the basic concept of Mutual Funds and highlight their importance in the Indian capital market environment. They touch upon varied aspects like Regulation of Mutual Funds, Investor expectations, Investor protection, Trend in growth of Mutual Funds and some are critical views on the performance and functioning of Mutual Funds. A few among them are Vidyashankar (1990), Sarkar (1991), Agarwal (1992), Sadhak (1991), Sharma C. Lall (1991), Samir K. Barua (1991), Sandeep Bamzai (2001),

Atmaramani (1995), Atmaramani (1996), Subramanyam (1999), Krishnan (1999), Ajay Srinivsasn (1999). Segmentation of investors on the basis of their characteristics was highlighted by Raja Rajan (1997). Investors characteristics on the basis of their investment size Raja Rajan (1997), and the relationship between stage in life cycle of the investors and their investment pattern was studied by Raja Rajan (1998). [29]

Akhilesh Mishra(2008) has done a study on the topic Mutual Fund as a Better Investment Plan and states that many of the people have the fear of Mutual Funds. They think their money will not be secure in Mutual funds, says Mishra. He also says that the investors need the knowledge of Mutual Funds and its related terms. Many of the people have not invested in Mutual funds due to lack of Awareness although they have money to invest, he adds. Mishra also points out that Brand plays an important role for the investment. Only people who invest directly know well about the Mutual fund and its operations, he adds. [30]

From the above review it can be inferred that Mutual Fund as an investment vehicle is capturing the attention of various segments of the society, like academicians, industrialists, financial intermediaries, investors and regulators for varied reasons and deserves an in depth study.