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CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION

Financial requirement of an individual finds no boundaries. Every


individual aims at maximizing the flow of income from whatever source
possible. The most interesting activity undertaken by an individual to fulfill
this objective is to undertake investing. It is a very interesting activity which
attracts people from all walks of life irrespective of their occupation,
economic status, education and family background. Investment means
employment of funds on assets with the aim of earning of income or capital
appreciation. The two main factors that influence investment decisions are
time and risk. Investment is the allocation of money to assets that are
expected to yield some gain over a period of time. The main criteria for
investment are the expected return, risk involved, and liquidity of investment

the different activities, but the common target in these activities is to

wealth. Funds to be invested come from assets already owned, borrowed


money and savings. By foregoing consumption today and investing their
savings, investors expect to enhance their future consumption possibilities by
increasing their wealth.( V K Bhalla, Investment management: Security
analysis and portfolio management, S Chand & co. ltd, 8th edition, Pg 3-15)

An individual who commits money to investment products with the


expectation of financial return is termed as an investor. Generally, the
primary concern of an investor is to minimize risk while maximizing return.

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Meaning of Portfolio

Portfolio is a combination of securities which include debt and


equity. The combination of debt and equity is necessary because debt provide
assured opportunities whereas equity gives higher returns but with an element
of uncertainty. Therefore in a portfolio, combination of debt instrument and
equity is important to compliment each other.

1.2 PORTFOLIO MANAGEMENT

The professional management of various securities (shares, bonds


and other securities) and assets (e.g.,real estaste) in order to meet specified
investment goals for the benefit of the investors is known as portfolio
management. Investors may be institutions (insurance companies, pension
funds, corporations, charities, educational establishments etc.) or private
investors (both directly via investment contracts and more commonly
via collective investment schemes like mutual funds etc.

1.3 REASON FOR INDULGENCE IN PORTFOLIO


MANAGEMENT

Earlier investment in portfolio was confined to rich and business


class. But in recent times it has become a common activity. The increase in
interest of people towards portfolio management can be attributed to the
following reasons:

1. Increase in working population which paves way for larger


income which in return results in higher savings. Amount of
savings is the main factor in investment.

2. Provisions of tax incentives in respect of investment in


specified channels.

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3. Availability of large and attractive investment alternatives

4. Availability of investment to provide income and capital gain

5. Increase in investment related publicity

6. Increase in the tendency of people to hedge against inflation

1.4 FACTORS THAT INFLUENCE INVESTMENT DECISIONS:

Investors have various needs to cater to. This induces them to


invest in various avenues which comprises of different types of securities.
While taking an investment decision the investors decide about the following:

1. The amount of money needed for investment.

2. The time span during which the money will be needed.

3. Assets that should be purchased.

4. The proportion of the total money that should be reinvested in


each particular asset.

5. The frequency of portfolio evaluation.

6. The most economical source of obtaining the required sum of


money.

Since the concept of portfolio has gained momentum in recent


times, the investors have a wide range of choice available with regards to
what to invest in. Investment should be in a combination of securities which
includes shares, debentures, bonds, fixed deposit, PPF, NSCs, post office
deposits, life insurance policies, mutual funds etc. The choice will depend on
whether the investor will depend on assured returns and safety of funds or
capital appreciation etc.

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1.5 TECHNIQUE OF PORTFOLIO MANAGEMENT

Investment management also known as portfolio management is


not a simple activity as it involves many complex steps:

Specification of investment objectives & constraints

Investment needs to be guided by a set of objectives. The main


objectives taken into consideration by investors are capital appreciation,
current income and safety of principal. The relative importance of each of
these objectives needs to be determined. The main aspect that affects the
objectives is risk. Some investors are risk takers while others try to reduce
risk to the minimum level possible. Identification of constrains arising out of
liquidity, time horizon, tax and special situations need to be addressed.

Choice of the asset mix

In investment management the most important decision is with


respect to the asset mix decision. It is to do with the proportion of equity
shares or shares of equity oriented mutual funds i.e. stocks and proportion of
bonds in the portfolio. The combination on the number of stocks and bonds
depends upon the risk tolerance of the investor. This step also involves which
classes of asset investments will be placed and also determines which
securities should be purchased in a particular class.

Formulation of portfolio strategy

After the stock bond combination is chosen, it is important to


formulate a suitable portfolio strategy. There are two types of portfolio
strategies. The first is an active portfolio strategy which aims to earn greater

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risk adjusted returns depending on the market timing, sector rotation, security
selection or a mix of these. The second strategy is the passive strategy which
involves holding a well diversified portfolio and also maintaining a pre-
decided level risk.

Selection of securities

Investors usually select stocks after a careful fundamental and


technical analysis of the security they are interested in purchasing. In case of
bonds credit ratings, liquidity, tax shelter, term of maturity and yield to
maturity are factors that are considered.

Portfolio Execution

This step involves implementing the formulated portfolio strategy


by buying or selling certain securities in specified amounts. This step is the
one which actually affects investment results.

Portfolio Revision

Fluctuation in the prices of stocks and bonds lead to changes in the


value of the portfolio and this calls for a rebalancing of the portfolio from
time to time. This principally involves shifting from bonds to stocks or vice-
versa. Sector rotation and security changes may also be needed.

Performance Evaluation

The assessment of the performance of the portfolio should be done


from time to time. It helps the investor to realize if the portfolio return is in
proportion with its risk exposure. Along with this it is also necessary to have a

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benchmark for comparison with other portfolios that have a similar risk
exposure.( Robert A strong, Portfolio management handbook, Jaico Pub
House, Ed194, Pg 85-88)

1.6 STRATEGIES OF PORTFOLIO MANAGEMENT:

Portfolio management strategies are of two types- Active portfolio


management strategy and Passive portfolio management strategy.

ACTIVE MANAGEMENT STRATEGY (Aggressive


investment strategy):

Active management is holding securities based on the forecast


about the future. It is a strategy followed by aggressive investors who strive to
earn superior returns, after adjustment for risk. This strategy involves
investing in high return high risk investments with the sole purpose of
maximizing return from investments. It involves allocating major portion of
portfolio capital to invest in equities, equity based funds and highly volatile
markets. Investors following aggressive investment strategy often look for
comparatively short-term profiting and wish to invest more in growth stocks,
and small caps and mid cap stocks.

PASSIVE MANAGEMENT STRATEGY (Defensive


management strategy):

Passive management is a process of holding a well-diversified


portfolio for a longer term with the buy and hold approach. Passive
pt to construct a portfolio that
resembles the overall market returns. This strategy is just opposite of
aggressive investment; its purpose is to preserve the capital and ensure some
return from investments. It involves investing in low profit low risk
investments like bonds, money market funds, treasury notes, and equities with

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minimum price volatility and good dividends. Defensive investors look for
long-term profits and/or monthly earnings. Advantages of defensive
investment strategy include reduced risk, predictable income, better
investment planning and diversification of portfolio. This strategy mainly
suits beginners. Disadvantages include low return from investments and
requirement of high capital investments. (Prasanna Chandra, Investment
analysis & portfolio management, Tata McGraw hill pub Co.ltd, Pg 493-
497)

1.7 NEED FOR THE STUDY

In contrast to olden days when family businesses were dominating


the economy, the liberalization of economy has paved way for many
businesses to enter the field of competition. With the impact of globalization,
companies are now into intense competition. Diversification of business has
become order of the day. Such expansion decisions have made the companies
to mobilize funds from the public. For this purpose, companies issue
securities in various forms like shares, debentures, bonds etc. General public
has various avenues to invest their funds and they choose an avenue which
satisfies their needs by giving maximum returns on investment, security of
funds and social security. Investing is simple but not easy. Investors always
want to make sure that the funds are invested and managed effectively as it is
their hard earned money. Investing in securities such as shares, debentures, and bonds is
profitable but involves a great deal of risk. In such investments both rationale and emotional
responses are involved. Investing in financial securities is considered as one is most
risky as well. Therefore creation of a portfolio helps to reduce risk, without sacrificing
returns. Portfolio management deals with the analysis of individual securities as well as with
the theory and practice of optimally combining securities into portfolios. An investor who
understands the fundamental principles and analytical aspects of portfolio management has
a better chance of success.
An investor considering investment in securities is faced with the problem of choosing from
among a large number of securities and the manner in which is to be allocated over this

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group of securities. He is also faced with the problem of deciding which securities to hold
and how much to invest in each. The investor tries to choose the optimal portfolio taking
into consideration the risk return characteristics of all possible portfolios.

But this investment decision of the investors does not remain rigid
for a long period and the composition of the portfolio keeps changing due to
various reasons. The main reason for changing the investment decision is
fluctuation in prices of stock. This is mainly influenced by goodwill of the
company, the returns it gives to the investors etc. but in recent times various
scam and rift in family business have shaken the stock market and the crises is
yet to be overcome. Such incidents induce the investors to reconsider their
investment decisions. This study is an attempt to find out the factors that are
considered to make investment decision and the factors that cause the changes
in the investment decision.

1.8 BRIEF REVIEW OF LITERATURE:

Review of past literature reveals that risk perception of investors is


influenced by behavioral factors like over confidence, regret aversion,
expectations, cognitive dissonance influence the investment decisions( eg.
Gong-Meng Chen,Kenneth A. Kim,John R. Nofsinger, Oliver M. Rui, 2005).
In spite of experience in investment behavioral mistakes still continue(eg
Markus Glaser & Martin Weber ,2007). Gender too influences the investment
preferences and demand for corporate social responsibility information is
more on the part of female investors. For investors to achieve goals hybrid
form of active and passive portfolio is preferred. Corporate social
responsibility of the company plays an important role in investment decisions.
Females demand more for CSR information(eg Ann L. Owen,Yejun Qian ,
September 2008 ). Mood of the investors influences the investment decisions.
Investors prefer equities in their portfolio as it outperforms bonds (eg Elroy
Dimson, and Mike Staunton , 2003). Positive risk attitude signifies high

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allocation in equities in portfolio which declines after retirement. Trading
strategy is changed by investors after experiencing regret. Investment
decision is influenced by past return consistency of stock. The two main
factors considered for investment decisions is maturity period and cost of
investment (eg Chang woon nam, Doina maria radulescu ,Feb 2004).
Investment decisions are based on experience. Through the experience
investors gain greater knowledge but the investing skills deteriorates due to
age factor. Investment decisions are also influenced mostly by quick returns,

that the influence of professional advice is much less. Internationalization of


financial information encourages foreign investments. Better educated
investors exhibit greater investment skills (eg Petra Halling, December 2009).
Investment decision is also effected by genetic composition and family
environment. The investment decisions are taken to satisfy the expectations of
the investors.

Investors consider trading history to adjust stock trading to improve


portfolio performance. Over diversification is indulged into expecting to

expectation is not satisfied due to failure to follow the measures induced


continuously.

1.9 GAP IN RESEARCH

The review of past researches indicates that the factors which


mostly influence the investment decisions of investors are of behavioral
pattern. These decisions are mostly effected by psychological biases and are
result of past experiences. Knowledge with regards to stock exchange policies
and financial reforms with respect to various investment avenues has been
ignored. Therefore in order to narrow down this gap, an attempt has been
made to study the impact of in- depth knowledge pertaining to these

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investment avenues on investment decisions and the investment behavior of
investors based on such knowledge. To get a better understanding of the

to know about the investment avenues, investment objectives, factors

after adopting the techniques and strategies.

1.10 OBJECTIVES OF THE STUDY

To study the socio-economic profile and investment avenues


of investors.

To examine the techniques of investors and its influence on


awareness and satisfaction.

To analyze investors awareness and strategies towards the


capital market investment portfolios.

towards the specific investment avenues.

To analyze the influence of demographic profile, investment

and satisfaction.

To find the relationship between techniques and strategies of


investors in the study domain.

1.11 HYPOTHESIS

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The study was commenced to test the validity of the following
assumptions relating to the evaluation of the investment portfolio of investors.

(i) The risk tolerance of investors does not differ significantly


with respect to different investment portfolios.

(ii) The investors do not differ in their awareness level with


respect to select investment portfolio.

(iii) The factors influencing investment satisfaction of investors do


not differ significantly.

(iv) There is no influence of demographic variables, investment

satisfaction.

1.12 RESEARCH METHODOLOGY

Pilot study and Pre-testing

A preliminary investigation was undertaken by surveying 100


investors through random sampling method to identify the demographic

The purpose of the pilot study was to test the validity of the variables in the
questionnaire and to confirm the feasibility of the study. Preliminary
investigation was conducted in different parts of Chennai. The Cronbach
alpha method was applied. This method is useful to measure the reliability
and validity of the questionnaire through the coefficient which depends upon
the variance in the perception of investors. The Cronbach alpha value was
found to be 0.924 which is statistically significant at 5 per cent level. It was
oint scale of the questionnaire are
highly reliable and the samples satisfy the normal distribution rationally. Thus
the research instrument proved valid for further study.

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Main Study

The data was collected by means of a five section questionnaire.


The Profile of the investors was dealt in Section I. Section II enumerates the
Overall investment portfolio followed by Risk tolerance in the III Section.
The IV & V section identifies awareness and satisfaction level of investors.
Part I & II of the questionnaire is designed in optional type, where as Part III
consists both optional and 5 point scale. Part IV & V comprises statements in
-point scale. The questionnaire with a covering letter was personally
administered to each and every respondent. The respondents were requested
to return the fielding questionnaire after 15 days. The respondents took a time
period of 15 days to 2 months to revert back the completed questionnaire.

Data Collection Procedure

The data collection started with segregating the region of study viz.,
Chennai into North Chennai, South Chennai, East Chennai and West Chennai.
This was done to ensure better region coverage and to receive quality data
from sample with diverse characteristics. North Chennai and South Chennai
comprises of predominantly high number of potential investors, owing to the
development it has witnessed during the last decade. On the other hand, East
Chennai and west Chennai has not grown comparatively and the hence the
proportion of potential investors is relatively less. In addition, more number
of banks and mutual fund institutions are established in North and South
Chennai, enhancing the availability of products to customers. As such, the
data collection segregated on the basis of region ensured that the random
sample has quality sample data to arrive at meaningful conclusions.

Sample Size

A sample size of 623 respondents was taken for the study on a


random sampling basis. Among the 623 respondents to whom it was

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administered only 514 respondents reverted back the filled in questionnaire.
Out of this only 500 of them were found to be suitable for analysis and study.
The study covers investors from selected parts of Chennai city. Hence, the
exact sample of the study is 500.

Data Analysis

Primary data was collected through a formal questionnaire


administered to the respondents to identify the awareness, involvement, and
evaluation of the investment portfolios. Reliance was also placed on the
secondary data made available on the subject and also the research of similar
studies conducted in the same area. The references of secondary data were
also made from published works like books, journals, reports, magazines,
dailies and also through various websites. The data collected from both the
sources were scrutinized, edited and tabulated. The data is analyzed using
statistical package for social sciences (SPSS) and other computer packages.
The statistical tools that were used in this study are Parametric t-test, One-
way analysis of variance, Factor analysis, K-means cluster analysis, Multiple
discriminant analysis and Non-parametric chi-square analysis.

1.13 SCOPE OF THE STUDY

Investment Portfolio management is essential to keep the


investment fabric intact. The idea Portfolio management is regarded as the
response of the financial markets to investor consensus. It relates to the
promotion of better investment in the direction of positive contribution to
value creation.

The present empirical study attempts to know the profile of


investors and analyze the characteristics of the investors.

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products and the satisfaction of various services rendered by
the providers.

The study tries to unravel the influence of demographic


factors like gender age etc, on risk tolerance level of the
investors.

The study is confined to select investment products.

1.14 LIMITATIONS OF THE STUDY

The total number of financial instruments in the market is so large


that it needs a lot of resources to analyze them all. There are various financial
institutions providing these financial instruments to the public. Handling and
analyzing such a varied and diversified data needs a lot of time and resources.
Thus the limitations of the study are as follows:

The study takes into consideration only five asset types, which
find a prominent place in the portfolio of any investor. Any
additional asset type might alter the results.

The Sample size was limited to five hundred investors.

The respondents were mostly from the middle and lower


income groups.

Reluctance of investors to provide complete information about


their investments can affect the validity of responses.

Due to time and cost constraint, study is conducted in only


selected area of Chennai city.

Lack of knowledge of investors about the financial


instruments can be a major limitation.

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Information can be biased due to the use of questionnaires.

The study is limited by the research period.

CHAPTER SCHEME

Chapter I Introduction Contains a brief description of the study,


Statement of the problem and is concluded with Scope,
Objectives, Limitations and Methodology.
Chapter II Review of Literature - Deals with the related work done
by different authors, Book Reviews, Journal references,
Working Paper citations and Industry Publications.
Chapter III Conceptual Framework - Deals with Theoretical and
Conceptual Framework of investment behaviour and the
profile of investment products in the portfolio of investors.
Chapter IV Analysis of investment preference and techniques
deals with an analysis of primary data with the help of
statistical tools.
Chapter V
investment focuses on the multivariate statistical analysis
of the primary data.
Chapter VI Conclusion - Summarizes the findings along with
suggestions to the investors for framing their investment
strategies.

CHAPTER 2

REVIEW OF LITERATURE

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Portfolio management is an investment game which has to be
played in a very prudent manner. An investor, before making an investment
decision should know his preferences based on which decision regarding the
portfolio is taken. After the portfolio preference is defined the investor
decides regarding the type of investment to be made. This investment decision
is influenced by various factors. To know if the portfolio investment is made

pertaining to these various aspects of portfolio management have been listed


out below:

Investment preference possess multifarious evidences demanded by


investors from past and to expect best returns in future. The pre dominant
factors safety and security of investment is vital for all investors when they go
for investment. Many investors expect their investment to work hard to fetch
maximum return in shorter time and to be multiplied in the long term
approach. Much national and international literature indentified various
preferences of investors as shown below:

Michale Dowling and Brian Luceyin (March 1999) state seven


common mistakes made by investors which are Trading too much, Investing
based on image, Following the crowd, Not diversifying, Knowing best,
,Following share price trends, and Ignoring the lessons of history

Cori E. Uccello (April 24,2001) state that spouses do not coordinate


their investment decisions to share risks. Instead, most of the spouses invest
similarly. In particular, the asset allocations of one spouse are highly
correlated with the asset allocations of the other spouse, even after controlling
for other factors. It is found that married households determine an overall
investment strategy, which each spouse then implements in the same way.

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Victor Ricciardi (July 20,2004) states that
perception of risk for different types of financial services and investment
products is influenced by the role of feelings, influence of worry, notion of
perceived control, significance of expert knowledge, overconfidence, concern
of potential losses, overall perceived riskiness of a sock, overall perceived
return of a sock and significance of investment time.

Gong-Meng Chen,Kenneth A. Kim,John R. Nofsinger, Oliver M.


Rui (2005) have stated that Chinese investors exhibit behavioral biases (i.e.,
they seem overconfident, inclined toward a disposition effect, and exhibit a
representativeness bias) and make poor ex post trading decisions. Investors
are often unable to overcome behavioral biases.

Giiven Sevil, Mehamet Sen, Adullah Yalama (2007) have


investigated the decision process of small investors in Istanbul stock
exchange. Their study is based on four main concepts of behavioral finance
namely Expectation theory, regret aversion (a decision taken in past yields
disastrous results and if the effect of gratification is equal to the pain the
investor is not affected y emotions in decision making), over confidence and
cognitive dissonance (theory of consistency where decisions are not changed
by the investors and to reduce the pain of regret they convince themselves that
their decision had been rational). The study was concluded on a note that the
investors are not totally rational as is believed in traditional finance theory.
Apart from considering what should be done what is already done should also
be considered.

Petko S. Kalev, Anh H. Nguyen, Natalie Y. Oh (2007) state that


foreign investors tend to choose stocks with international profiles and
transparent information. They outperform the local investors with regards to
global sock. Excluding the global stock, local investors earn better. In the
medium and long term, local investors have stronger performance.

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Markus Glaser & Martin Weber (2007) have documented biases
of individual investors. Inexperienced investors are not able to give a reasonable self-
assessment of their own past realized stock portfolio performance which
impedes investors' learning ability. Investors are hardly able to give a correct estimate of

their own past realized stock portfolio performance and that experienced investors are
better able to do so. In general, we can conclude that we find evidence that investor
experience lessens the simple mathematical error of estimating portfolio returns, but seems
not to influence their 'behavioral' mistakes pertaining to how good (in absolute sense or
relative to other investors) they are.

Angela Lyons, Urvi Neelakantan, Erik Scherpf (march2008) have


attempted of find answers for quarries like difference between the investment
and wealth management practices of men and women, disparities in wealth
across gender and marital states on account of risk tolerance, the impact of
control over wealth on the bargaining power within the household which in
turn influences the financial planning decisions. It is stated that the risk
tolerance important factor in making investment decisions. Women may
generally understate their risk tolerance and their observed preference for
more conservative investments may result from a lack of financial knowledge.
Thus, before recommending overly conservative portfolios to women, there is
a need to better educate women about the risk-return tradeoff and help them
make more informed choices. Men need to be cautioned about the pitfalls of
trading excessively, which leads to a fall in investment returns. Women need
additional guidance on how to make investment choices that carry a certain
amount of risk so that there is sufficient growth in their savings.

Vanita Tripathi (May 15,2008) examines the perceptions,


preferences and various investment strategies in Indian stock market reveal
that investors use both fundamental as well as technical analysis while
investing in Indian stock market. Size of the firm, market equity, price
earnings ratio, and leverage etc influences stock prices. The investment

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strategies in Indian stock market are buying stocks for which some good news
is expected, buying stocks which are expected to announce bonus issue,
momentum strategy, size strategy and following investment behaviour of
FIIs.(foreign institutional investors).

JingYu Zhang (September 2008) states that both approaches have


its strengths and weaknesses. Investors who do not bother about the past and
look forward achieve their goals. Active and passive investing serves for
different clients with different risk exposures. Both strategies could results in
higher gains for investors. The development of the hybrid form of active and
passive portfolio management is needed for investors to achieve their goals.

Jasim Y. Al-Ajmi (2008) indicate that Men are less risk averse than
women, Less educated investors are less likely to take risk. Wealthy investors
are more risk tolerant than the less-
declines when they have more financial commitments as well as when they
are approaching towards their retirement age or are retired..

Ann L. Owen,Yejun Qian (September 2008 ) state that


demographic characteristics as well as non-financial motives play an
important role in deciding whether or not to consider SRI products. Female
investors, those who actively participate in religious groups, and those who
consider the societal impact of their purchases as consumers are more
interested in the social aspects of the companies they invest in. individuals
who expect to leave inheritance are also consider corporate social
responsibility in investment decisions.

Leda Nath, Lori Holder-Webb, David Wood , (feb12,02009) state


that Different attitudes and values among individuals may lead to unique
preferences for which type of information is preferred in decision making,
while different attitudes and values among groups may lead to differences

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between social categories in information preferences. The gender differences
affect the demand for corporate social responsibility information in terms of
content and format. Females possess structural differences in their
investment-making decision information preferences compared to males.
Females exhibit higher demand for CSR information than do men; they also
exhibit greater demand for streamlining of the information flow.

R. A. J. Campbell, C. G. Koedijk, F. A. de Roon (feb 19, 2009)


state that investors tend to integrate the personal and social values into the
portfolio management process.. The emotional assets, art, wine, stamps,
atlases and books show positive excess return over the period. There is
significant divergence in the behavior of the various price indices to enable an
investor to benefit from holding a diversified portfolio of these emotional
assets. Investors are willing to give up some risk adjusted returns in favor of
some emotional value.

Raluca Bighiu Qawi (april 30,2010) attempts to understand the


behavior of investors and biases and effect of irrational decisions over market
performance due to psychological reasons like unconscious herding behavior(
as a results of genetic setup), risk taking capacity of the investor and risk
aversion attitude, investor sentiments etc. Factors such as cash availability and
optimism, effect of past performance over future uncertainty, social
responsibility in investment decisions and influence of analysts also influence
the decisions of the investors.

Enrico Maria Cervellati, Pino Fattori , Pierpaolo Pattitoni(may

also stated that the numer of trading activity is more for men, people who
have higher income and those who use internet for trading. The job type also
determines the trading decisions. Self-employed individuals make more
trading transactions.

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Gabriele M. Lepori (oct 2010) states that mood swings of the
investors affects the decisions of the investors. It is stated that some
environmental factor (e.g.sunshine, hours of daylight, sports results, aviation
disasters, etc) is responsible for generating mood changes in a large fraction
of the investor population, which in turn translate into changes in risk
aversion and/or optimism and affect portfolio choices. Positive mood induces
people to behave more cautiously and avoid risk, especially when the stakes
are high and large losses are possible, in order to preserve their good
emotional states..

Dennis Dittrich, Werner Güth, BorisMaciejovsky (dec 2010) state


that overconfidence increases with the deviation of actual from optimal
investments, indicating that the less accurate their investment decisions are,
the more prone are participants to exhibit overconfidence. Overconfidence is
more pronounced in the more complex combinations of assets. Investors who
believe that their life is largely controlled by external factors are less often
classified as overconfident. Males are less prone to overconfidence than
females.and age is negatively correlated with overconfidence.

Syed Tabassum Sultana (2010) has attempted to discover the


relationship between a dependent variable i.e., Risk Tolerance level and
independent variables such as Age, Gender of an individual investor on the
basis of the survey. It has been concluded that investors prefer to park their
funds in avenues like PPF/FD/Bonds next to Equities and Mutual Funds
scheme. Most of the investors get their information related to investment
through electronic media (TV) next to print media (News paper/ Business

risk tolerance level. The individual investor still prefers to invest in financial

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products which give risk free returns. This confirms that Indian investors even
if they are of high income, well educated, salaried, independent are
conservative investors and prefer to play safe.

Helen Brown-Liburd, Valentina L. Zamora (January 2012) have


investigated how a company s higher or lower level of CSR investment
(either top or bottom industry ranking) and the presence or absence of CSR
assurance affect an investor s judgments about the company. It is found that
higher investment in CSR influences the stock price revisions as did the
investors fairness perception of CSR and assurance services did have an
effect when the disclosed CSR information was most positive (i.e., higher
CSR investment).

Nik Maheran Nik Muhammad (anonymous) state psychological


biases affect investor behavior and prices. The most common behavior that
most investors do when making investment decision are Investors often do
not participate in all asset and security categories, individual investors exhibit
loss-averse behavior, Investors use past performance as an indicator of future
performance in stock purchase decisions, Investor trade too aggressively,
Investors behave on status quo, Investors do not always form efficient
portfolios, Investors behave parallel to each other, and Investors are
influenced by historical high or low trading stocks. However, there are
relatively low-cost measures to help investors make better choices and make
the market more efficient.

Studies reveal that risk perception of investors is influenced by


behavioral factors. Behavioral biases like over confidence, regret aversion,
expectations, cognitive dissonance influence the investment decisions.
Experience in investment may reduce mathematical errors but behavioral
mistakes continue. Gender too influences the investment preferences where
female need to be educated about risk- return trade off and warn men against

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excessive trading. Investors indulge in fundamental and technical analysis
before deciding about investment. For investors to achieve goals hybrid form
of active and passive portfolio is preferred. Corporate social responsibility of
the company plays an important role in investment decisions. Females
demand more for CSR information. Mood of the investors influences the
investment decisions. These sorts of preferences compel the investors to go
into the domain of portfolio preference to choose proper investment.

After preferring the investment avenues returns and risk in


investment, it is difficult for investors to prefer the best portfolio to yield
maximum returns. The investment satisfaction are also preferred at this point
of inception itself but it purely depends upon the portfolio preference.

Portfolio preference

Portfolio preference of the investors is influenced by the return


expected by them and the desire to take risk. The composition of portfolio
reflects the intention the investors and his investment strategy. This strategy
changes with advancement in age and experience according to the change in
needs. The studies below show the portfolio preference of investors and the
factors that influence the portfolio preference:

Elroy Dimson, and Mike Staunton (2003) state that Equities has an
important role in long-term portfolios. Though he risk is high, equity
outperforms bonds, bills in terms of returns. To maximize the probability of
favorable real returns, equities should be held within a diversified portfolio.

Matallín-Sáez, Juan Carlos and Fernández-Izquierdo, Angeles


(2005) analyses the effect of passive timing in the application of
measurements. This effect is produced when a portfolio which is not managed
actively shows signs of instability in its level of systematic risk. It was found

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that the effect of passive timing creates bias in the application of
measurements used to evaluate market timing ability. It was also found that a
negative relationship exist between the selection of individual assets and
market timing.

Elias Alanko (2009) finds that the attitude of Finnish investors


towards risk is very risk averse but having a high allocation in equities and
having debt signifies positive risk attitude. The risk attitudes of investors
increase until retirement after which the risk attitude starts declining.

Prachi Deuskar, Deng Pan, Scott Weisbenner, Fei Wu (February


2012) have investigated the effect of regret on future decisions in the context
of stock-trading strategies by individual investors. It is found that people are
more likely to change their trading strategy, i.e., whether to place a desperate
or patient order, after experiencing regret over their most recently submitted
order. The emotionally-charged decisions made because of regret lead to
worse outcomes for investors, with the poor returns resulting from these
decisions lasting for at least few months.

Angela M. Warnerton, (anonymous) states that for successful


investment, it is necessary that investors should understand the need for an
investment strategy. Investors should make specific choice of securities and
must decide whether the want to invest in specific type of securities or in
varied ones. Over diversification should be avoided. After deciding on what
to invest, investors must gather information about the securities and develop a
research strategy. Decision must be taken as to how much amount is to be
invested. Then a portfolio has to be built and periodically reviewed.

Investors prefer equities in their portfolio because even though the


risk is high, equity outperforms bonds. Passive timings create bias in portfolio
management. Positive risk attitude signifies high allocation in equities in

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portfolio which declines after retirement. Trading strategy is changed by
investors after experiencing regret. Portfolio management requires the
investors to understand the need for investment strategy.

After the investment preferences are decided upon, the investors


struggle to make a decision about investment. In order to choose an optimum
portfolio, investors take various investment decisions based on numerous
factors.

Investment decisions

Investment decisions of investors are influenced by numerous


factors like biases, past experiences (positive and negative). The decisions do
not remain consistent for long duration. As expectations and need changes,
investment decisions also change. The composition of portfolio depends upon
the investment decisions. Many studies reveal the manner in which investors
take decisions and the factors that influence these decisions. Some of these
studies are as follows:

Boyce D. Watkins (July 2003) investigate whether past return


consistency is used as a predictor of future returns. Positively consistent
stocks are considered riskier than stocks that do not have such consistency.
Negatively consistent stocks are argued to be less risky. It is found that for
holding periods of one month or less, positively consistent stocks (those
stocks that have had positive returns for 2/3 of the 6 or 12 day pre-investment
period) have lower future returns and negatively consistent stocks have higher
future returns. This effect holds when controlling for momentum, firm size,
and share turnover of the given security. The returns to interactive portfolios
tend to be twice as high as those from any momentum portfolio formed, and
roughly 20% higher than the most profitable consistency portfolio. Interactive
portfolios are profitable for 80% of all holding periods measured.

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Chang woon nam, Doina maria radulescu (Feb 2004) study the
relationship between maturity period and cost of investment. The selection of
maturity years can play a significant role in reducing costs related to the debt-
financed investment. The optimum debt maturity is correlated positively with
the corporate tax rate but negatively with the interest rate.

Brian M. Lucey ,Michael Dowling(2005) conclude that Small


investors are more likely to allow feelings to affect their decision-making as
the decision-making process is characterized by greater uncertainty for them
than for the professional investors who dominate the pricing of large stocks.
Greater uncertainty has been linked with greater use of feelings in the
decision-making process. Investors spend a substantial part of their leisure
time discussing investments, reading about investments, or gossiping about

behaviour would be influenced by social movements.

George M Korniotis , Alok Kumar (march 20,2006) examine


investment decisions of older individual investors. According to their study
investment decisions of older individual investors and experienced investors
are more likely to follow "rules of thumb" that reflect greater investment
knowledge. However, older investors are less effective in applying their
investment knowledge and exhibit worse investment skill, especially if they
are less educated, earn lower income, and belong to minority racial/ethnic
groups. The adverse effects of aging dominate the positive effects of
experience. Older investors' portfolio decisions reflect greater knowledge
about investing but investment skill deteriorates with age due to the adverse
effects of cognitive aging.

Edwin J. Beinecke, Ravi Dhar, George Rogers Clark (2006) state


that the motives for trade are based upon a belief in the value offundamental
research and a belief in the importance of past price trends. Investors on

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average believe that markets over-react to news announcements. Many
investors buy stocks they believe to be over-valued on the anticipation that the
share prices would continue to rise.

Hussein A. Hassan Al-Tamimi (2006) has identified the most and


the least influencing factors on investor behavior. The six factors that
influence the investors are: expected corporate earnings, get rich quick, stock

creation of the organized financial markets. Five factors that influence the
least are: expected losses in other local investments, minimizing risk,
expected losses in international financial markets, family member opinions
and gut feeling on the economy.

Milan Lovric, U.Kaymak, J.Spronk (2008) states that investment


decisions are seen as a process of interactions between the investor and the
investment environment. This investment process is influenced by a number
of interdependent variables and driven by dual mental systems, the interplay
of which contributes to rational behavior where investors use various
heuristics and may exhibit behavioral biases.

Ralph Blethergen, Andreas Gottschalk, Andreas Hackethal (2008)


focus on the general question of whether honest or deceptive financial advice
is likely to be more pervasive. Results indicate that, while both forms are
prevalent, it cannot be ruled out that financial advisory services provide net
benefits for some investors. The clients advised are older, wealthier, more risk
averse and more likely to be female investors who can be assumed to face
higher costs for information acquisition are more likely to rely on financial
advice. For these investors financial advice enhances (international) portfolio
diversification. Financial advice enhances portfolio diversification. However,
since advice comes at a cost in the form of increased portfolio turnover
accompanied by relatively higher transaction fees.

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investors
understand their lack of knowledge and ability to obtain and analyze the
financial data and use on-line brokers mainly to invest into exchange traded
mutual funds that track market indices. It is found that the investors invest
more in stocks with extremely high or low short-term realized returns, invest
more in stocks with higher short-term realized returns, and invest more in
stocks with lower long-
such as risk, P/E ratio and dividend yield, have no significant effect on the
investment decision .Significant number of investors use momentum
investment strategies based on the short-term realized stock returns and
contrarian strategies based on the long-term realized stock performance. The
investors do not change their momentum and contrarian strategies over time.

Ralf Gerhardt, Andreas Hacketha(2009) have investigated the

financial advisors on household portfolios: A study on private investors


state that the effect of investment advice
is less than what is generally assumed.

Dan Amiram (2009) investigates the association between the


globalization of financial information, specifically defined as the use of
international accounting standards, and foreign investment decisions. It is
found that foreign investments are higher for countries that use international
accounting standards. Foreign investors have statistically and economically
higher holdings of foreign equity portfolio investments (FPI) in countries that
use international accounting standards especially when foreign investors are
from countries that also use international accounting standards. It is also
stated that countries with lower corruption and better investor protection
experience larger benefits, in terms of FPI increase, from the use of

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international accounting standards than other IFRS (international financial
reporting standards) users.

Oleg Badunenko, Dorothea Schäfer (2009) state that gender


differences in portfolio choices cannot be attributed to differences in risk
tolerance between the two groups. Males and females invest equal shares of
their wealth to risky financial assets, gender differences in portfolio choices
cannot be attributed to differences in risk tolerance between the two groups.
Financial advice should be provided in accordance with individual risk
preferences of individuals rather than to be based on the stereotypical believes

Abhijeet Chandra (Nov 2009) state that individual investors do not


always make rational investment decisions. Their investment decision making
is influenced by behavioral factors like greed, fear, cognitive dissonance,
mental accounting, overconfidence, repetitiveness and anchoring etc. These
biases play an integral role in -making.

Petra Halling (December 2009) examines whether better educated


investors make smarter investment decisions and exhibit greater investment
skill than less educated ones. It also analyzes how the education of individuals
influences the general stock investment performance as well as excess
trading, under diversification and the home bias phenomenon. It is found that
older investors and traders with a university degree achieve a better stock
investment performance than less educated and younger individuals. Better
educated investors display a lower stock turnover rate.

Amir Barnea, Henrik Cronqvist, and Stephan Siegely, (2010) state


an individual's genetic composition is an important determinant of the
individual's investment behavior. While the nature is an important
determinant of an individual's investment behavior, there is also considerable

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environmental influences. It has been found that the non-shared environment
tends to be much more important than the shared environment in explaining
the cross-sectional variance in investment behaviors. The family environment,
i.e., nurture, does have a significant effect on the investment behavior of
young individuals, but this effect is not long-lasting. It disappears when an
individual gains own experiences.

Alen Nosic, Martin Weber ( 2010) analyze the determinants of


investors' risk taking behavior. Risk taking behavior is affected by an
individual's risk attitude and by his / her subjective perceptions of risk and
return. Determinants of risk taking behavior not only vary between
individuals but also between investments. Overconfidence (i.e.
miscalibration) has an impact on risk taking behavior.

M.Kannadhasan (April 2010) state


characteristics on risk analysis in strategic investment decisions. It is

organization possess relatively restrictive perspective and a limited


knowledge base in considering various alternatives while making decisions.
The individuals with longer tenures being associated within a firm shows a
decline in the amount of information gathered and processed because they
develop a set of habits, establishing routine information sources, and rely on
past experiences.

Arvid O. I. Hoffmann, Hersh Shefrin, Joost M. E. Pennings( 2010)

strategies impact the portfolios they select and the returns they earn. It is
found that investors driven by objectives related to speculation have higher
aspirations and turnover, take more risk, judge themselves to be more
advanced, and underperforms relative to investors driven by the need to build
a financial buffer or save for retirement. Investors who rely on fundamental

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analysis have higher aspirations and turnover, take more risks, are more
overconfident, and outperform investors who rely on technical analysis.

Joseph F. Brazel, Keith L. Jones, Rick C. Warne (September 2010)

their perception of the frequency of fraud occurrence, the importance they


place on fraud risk assessment. A positive relation is found between investor
reliance on financial statement information and the importance of fraud risk
assessment becomes stronger as investor perceptions of the rate of fraud
increase. Investors who perceive fraud risk assessment as an important
activity appear to act on these perceptions. A positive association exists

of fraud red flags (e.g., analyses of accruals, management turnover) when


making investment decisions. Investors tend to focus on pending litigation,
violations of debt covenants, and high management turnover.

Ken Little (anonymous) state investors remember the sour feelings


of losing money in an investment more acutely than making the same amount
of money in a winning investment. Emotions play a very impotant role in
investment decisions because they trump logic unless one has a plan that is
prepared in advance and commit to stick with regardless of what else is
happening. Emotional investors usually make all the wrong decisions for all
the wrong reasons. The safest way is to plan a sell strategy before buying a
stock. It is necessary to decide at what point the investment cannot be held
longer and mark that as selling point. There is emotion attached to money and
there is no escaping that fact. Investors can minimize the influence that
emotions play on investment decisions by planning the exit strategy even
before the stock is bought. .

Investment decision is influenced by past return consistency of


stock. The maturity period and cost of investment has a significant role in

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decisions. Small investors allow feelings to affect their decisions. Investment
decisions are based on experience. Older investors reflect greater knowledge
about investing but investing skills deteriorates with age. Reacting to news
announcements investors buy stock which they believe to be over valued.
Investment decisions are influenced the most by quick returns, past

behavior. Studies also reveal that the influence of professional advice is much
less than what is assumed. Internationalization of financial information
encourages foreign investments. Risk tolerance in investment decision is not
much influenced by gender differences. The psychological factors influence
the investment decisions of a person. Better educated investors exhibit greater
investment skills. Investment decision is also effected by genetic composition
and family environment. The investment decisions are taken to satisfy the
expectations of the investors.

After investment decision is made the investors are driven to take


certain steps to achieve their investment objectives which range from
maximum returns to maximum satisfaction pertaining to various factors.
Therefore after making the investment decisions the investors analyze the
various that lead to maximum satisfaction.

satisfaction for which, at times, the investors indulge into over diversification.
The composition of portfolio aims at satisfy the various needs of the investors
which could be maximum returns, security of funds, social security or a
combination of any of these. The studies below show the investors
expectation and factors influencing their satisfaction:

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Gina Nicolosi, Ning Zhu (March 2004) state individual investors
adjust their stock trading according to their stock selection abilities, which is
inferred from their trading history. Trading experience helps in improving
portfolio performance. Particularly, as an investor completes more purchase
transactions and purchases more unique stocks, the portfolios subsequent risk-
adjusted monthly return is higher. Individual investors (despite making
numerous documented mistakes) learn from their own trading experience,
adjust their stock purchases accordingly, and achieve higher portfolio
performance.

Arianna Spina Pinello (Ma y 2007) state that investors make


adjustments to analyst forecasts to reduce perceived biases in analyst
pectations relative to analyst forecasts
produce an asymmetrically strong reaction to positive vis-à-vis negative
reported earnings surprises. Investor reaction to changes in their earnings
expectations reveals loss aversion. Biases in analyst forecasts do not persist
in investor expectations. Differences between investor expectations and
analyst forecasts produce an asymmetry in the reaction to positive vis-à-vis
negative reported earnings surprises that reverses when the earnings surprise
is measured as perceived by investors.

Arvid Hoffmann in his investment survey (November 2007)


indicates that besides financial needs, the investors strive to satisfy more
socially oriented needs through investing. These investors identify themselves
with other investors and enjoy participating in investment-related
conversations

George Y. Wang1 and Yu-Ting Yang (2007) state that over-


diversification potentially incurs marginal costs for reasons like over-
diversification is increases monitoring costs of portfolio management as the
staff of fund management is mostly minimized to only necessary manpower.

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Over-diversification increases transaction costs as fund managers have to
routinely rebalance the portfolio according to stipulated investment strategy.
Including of too many stocks in a portfolio dilutes, or even distorts, the fund
-linear
relationship exists between portfolio performance and portfolio size in terms
of the number of stocks.

Dennis Vrecko, Thomas Langer (Dec 23, 2009) investigate the


strength of preference for customized distributions. For investors with specific
risk preferences, further customization provides additional value. It has been
found that most investors have a strong preference for customization and
many are willing to pay so much for such customization that dominance
violations result. On average, investors do not act skewness seeking during
customization and investors are strongly willing to pay for additional
flexibility even though the actual benefits of customization vary largely by the
individual.

Nidhi Walia, Dr. Mrs. Ravi Kiran


expectations and identify the parameters that account for their dissatisfaction
with regards to mutual funds.Despite higher ROI, many fund schemes fail and
results in dissatisfaction among investors because the measures introduced are
not followed continuously .Most of mutual funds concentrate to improve the
return they could provide to investors without paying any attention to quality
of services expected by investors. Mutual fund industry should design
innovative designed schemes that can assure them not only the financial
benefits but also value added quality services.

Investors adjust stock trading based on trading history with an

confidence. Investors strive to satisfy more socially oriented goals through

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investment. Over diversification is indulged into expecting to spread the risk.

satisfied due to failure to follow the measures induced continuously.

GAP IN RESEARCH

The review of past researches indicates that the factors which


mostly influence the investment decisions of investors are of behavioral
pattern. These decisions are mostly effected by psychological biases and are
result of past experiences. Knowledge with regards to stock exchange policies
and financial reforms with respect to various investment avenues has been
ignored. Therefore in order to narrow down this gap, an attempt has been
made to study the impact of in- depth knowledge pertaining to these
investment avenues on investment decisions and the investment behavior of
investors based on such knowledge. To get a better understanding of the

to know about the investment avenues, investment objectives, factors


cons

after adopting the techniques and strategies.

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