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ABSTRACT
Consumer behaviour from the marketing world and financial economics has brought together to the
surface an exciting area for study and research: behavioural finance. The realization that this is a
serious subject is, however, barely dawning. Analysts seem to treat financial markets as an aggregate of
statistical observations, technical and fundamental analysis. A rich view of research waits this
sophisticated understanding of how financial markets are also affected by the ‘financial behaviour’ of
investors. With the reforms of industrial policy, public sector, financial sector and the many
developments in the Indian money market and capital market, Mutual Funds which has become an
important portal for the small investors, is also influenced by their financial behaviour. Hence, this
study has made an attempt to examine the related aspects of the fund selection behaviour of individual
investors towards Mutual funds, in the city of Mumbai. From the researchers and academicians point of
view, 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, deregulation
and restructuring. The Indian economy has opened up and many developments have been taking place in
the Indian capital market and money market with the help of financial system and financial institutions or
intermediaries which foster savings and channels them to their most efficient use. One such financial
intermediary who has played a significant role in the development and growth of capital markets is
Mutual Fund (MF).
The concept of MFs has been on the financial landscape for long in a primitive form. The story of mutual
fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the
Government of India and Reserve Bank. The launching of innovative schemes in India has been rather
slow due to prevailing investment psychology and infrastructural inadequacies. Risk adverse investors
are interested in schemes with tolerable capital risk and return over bank deposit, which has restricted the
launching of more risky products in the Indian Capital market. But this objective of the MF industry has
changed over the decades. For many years funds were more of a service than a product, the service being
professional 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’ to
cater 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 to
their doorstep. In India, a small investor generally goes for bank deposits, which do not provide hedge
against inflation and often have negative real returns. He has limited access to price sensitive information
and if available, may not be able to comprehend publicly available information couched in technical and
legal 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 financial
intermediaries/ portfolio managers who process information, identify investment opportunities, formulate
investment strategies, invest funds and monitor progress at a very low cost. Thus the success of MFs is
essentially the result of the combined efforts of competent fund managers and alert investors. A
competent fund manager should analyze investor behaviour and understand their needs and expectations,
to gear up the performance to meet investor requirements.
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actual practice. These ‘ expectations’ of investors are influenced by their “ perception” and humans
generally relate perception to action. The beliefs and actions of many investors are influenced by the
dissonance 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 state
among MF investors in India. For instance, UTI, which is synonymous to mutual funds in India, had a
glorious past and perceived as a safe, high yield investment vehicle with the added tax benefit. Many
UTI account holders have justified their beliefs by staying invested in UTI schemes even after the 1999
bail out and the July 2001 episode of repurchase freeze on US 64 for 6 months. “Endowment Effect” is
explained by Thaler Kahneman and Knetsh (1992) thus: “ People are more likely to believe that
something they own is better than something they do not own” . We have evidence of this effect also
among Indian MF investors, for, how else we can explain the existence of many poor performing funds
with investors staying invested with them?
In general, rules for investment, the analysis of investment and discussion of financial behaviour tend to
assume behaviour, which is logical and internally consistent in various ways. Investor behaviour does
not; however, always appear to conform to such expectational norms. Quite the reverse often appears to
be 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 performance
relative to the world outside the individual, so too cognitive illusion will result in inconsistent decision
making with respect to the outside world. Much of economic and financial theory is based on the notion
that 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 that
trying to fit individual investor’ s behaviour into a model is impossible. Investor’ s behaviour may change
from period to period even if the other variables influencing the behaviour are held constant. However, to
a certain extent, we can borrow concepts from social psychology where behavioural patterns, rational and
irrational are observed and empirically tested. On the same lines we can develop certain models to
identify the financial behaviour, to the extent of the availability of the explanatory variables. Such
models can help to understand the “why” and “ how?” aspect of investor behaviour, which can have
managerial implications for policy makers.
Hence, with this background, this study attempts to evaluate the behavioural aspects of fund selection
techniques 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 practitioner
communities. Compared to the developed markets, very few studies on MFs are done in India. This
literature 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.
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In the first group 84% chose A. In the second group 69% chose B. The two problems are identical in
terms of net cash to the subject; however the phrasing of the question causes the problem to be
interpreted differently.
Langer (1983) suggests that when these preferences are based on choices, there is more ego involvement
and attachment to the preferences, suggesting heightened level of preference bias. This phenomenon is
consistent 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 more
likely 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 a
result of participating in investor education programmes sponsored by employees.
Berhein and Garnette (1996) affirmed Philip’ s findings and further stated that a serious national
campaign to promote savings through education and information could have a measurable impact on
financial behaviour.
Alexander et al., (1996) reported that only 18.9% of respondents could provide an estimate of expenses
for their largest MF holding. 57% stated that they did not know what the expenses were even at the time
they made the MF purchase. This suggests insensitivity to costs and many investors do not use fund costs
as 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; disposition
effect, individuals are prone to sell their winners too quickly and hold on to their losers too long
(http://www.investorhome.com/psych.htm).
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primarily due to tax concessions. UTI and SBI schemes were popular in that part of the country then and
other 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 investment
pattern.
Syama Sunder (1998) conducted a survey to get an insight into the MF operations of private institutions
with special reference to Kothari Pioneer. The survey revealed that the awareness about MF concept was
poor during that time in small cities like Vishakapatnam. Agents play a vital role in spreading the MF
culture; open-end schemes were much preferred then; age and income are the two important determinants
in 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 savings
of individuals, for which a survey of households was undertaken. Another NCAER study in 1996
analyzed 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, and
investment preference for equity as well as other savings instruments. This is a unique and
comprehensive study of individual investors, for, data was collected from 3, 00,000 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 (estimated around 60 million households) apparently lack
awareness about stock markets; and, compared with low income groups, the higher income groups have a
higher share of investments in MFs signifying that MFs have not truly become the investment vehicle for
small investors; the number of households owning units of mutual funds is more (9%) than the investor
households owning investments in shares and debentures (8%). Nevertheless, the study predicts that in
the 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 sourcing
by investors, their perception of various investment strategy dimensions and the factors motivating share
investment decisions, and reported that, psychological and sociological factors dominated economic
factors in share investment decisions.
Rajeshwari T.R and Rama Moorthy V.E (2002) studied the financial behaviour and factors influencing
fund/scheme selection of retail investors by conducting Factor Analysis using Principal Component
Analysis, to identify the investor’ s underlying fund/scheme selection criteria, so as to group them into
specific market segment for designing of the appropriate marketing strategy.
Kiran D. and Rao U.S. (2004) identified investor group segments using the demographic and
psychographic characteristics of investors using two statistical techniques, namely – Multinomial
Logistic 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 the
nature of the portfolio.
Table 3.1
INDICATIVE PORTFOLIOS FOR VARIOUS AGE GROUPS
AGE EQUITY BALANCED MIPs DEBT FIXED TOTAL TOTAL
MF MF MF INCOME EQUITY DEBT
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 developing
markets also deserve an extensive research.
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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-2: To evaluate fund qualities that would affect the selection of Mutual funds.
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 of
individual 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 influence
MF/Scheme selection.
5. METHODOLOGY
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1. Savings Objective of Individual Investors
Savings Objective of the majority of Individual Investors is ‘ to provide for Retirement’ , thus throwing
light on the nature of risk averse investors. AMC can attract a pool of investors by designing products for
Risk-Averse investors.
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8. Preferable Route to Mutual Fund Investing Among Individual Investors
Investors may use some sources to gain awareness regarding investing in Mutual Funds. The sources in
the present study are confined to Reference groups, Newspapers – General & Business, Financial
Magazines, Television, Brokers/ Agents, E-Mail and Stores Display. Findings of the study reveal that
investors attach high priority to published information, thereby preferring Newspapers – General &
Business and Financial Magazines. This throws light on the possibility that MF investors spend time
analyzing and examining relevant information before taking any crucial decision.
On the other hand, there emerged another category of people, which evolved to 31% according to the
study, who do not want to be at the mercy of the broker-friend-advisor network. These individual
investors are able to articulate their own situation and risk preference and then apply a strategy that
combines the usual four; cash and equivalents, government bonds, debt and equity. The catch is that only
few have the capability to do the dynamic juggling among the four on their own. The study reveals yet
another category of respondents, ‘ Do Not Know’ , which sums up to 21%. This category may include
people who either have a low awareness level about MF industry or still do not completely believe that
MFs can get the same return like that of Equity shares. This calls for an extensive and comprehensive
education programme among the people.
The number of respondents who have good awareness level of MFs results to 53%. This could be
attributed to the wide publicity given to MF industry by the media for varied reasons. Agent training
programmes and investor education programmes organized by AMFI at regional levels during 2003-04
could also have contributed to this level of awareness However, this study was based in a metropolitan
city 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 small
investors live. The challenge would be to educate these investors about the advantages of investing in
mutual funds compared to traditional saving instruments.
The results of Chi-Square test shows that Awareness level is Dependent only on Academic
Qualifications. AMCs should take note of this and follow a segmented approach in marketing the product
and in creating awareness.
Top-Of-Mind Recall test of Mutual Funds was administered in the questionnaire, which was distributed
to 100 respondents during September – October 2004, in Mumbai. This study yielded superlative results
where 22 registered MFs (not schemes) were recalled by the investors, UTI being most promptly
remembered among the investors. It is baffling to know that out of 37 registered MFs, 22 MFs (not
schemes) were recalled, in a few moments of time spent by the investor in filling up the questionnaire.
This tool of SPSS was extensively used to classify a large number of variables into smaller number of
factors. Factor Analysis was used to determine whether there was any common constructs that
represented investor concerns. 25 variables were analysed using the Varimax Algorithm of Orthogonal
Rotation, the most commonly used method. Evaluation of the resulting constructs and naming of the
factors is largely subjective. Hence, to identify investors’ underlying Fund/Scheme selection criteria, so
as to group them into specific factors, which would further identify Investor types, to enable the
designing of appropriate marketing strategies, Factor Analysis was done using Principal Component
Analysis.
• Factor analysis for Fund Related Qualities
In 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 factor
analysis. The approximate chi-square statistic is 249.175 with 55 degrees of freedom, which is significant
at .000 levels. The KMO statistic (0.810) is also large (>0.5) Hence factor analysis is considered an
appropriate technique for further analysis of data.
Retaining only the variables with Eigen values greater than one (Kaiser's criterion), we can infer that
34.818% 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. Under
Varimax 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 Kaiser
Normalisation, 3 factors have emerged. Each factor is constituted of all those variables that have factor
loadings greater than or equal to 0.5. Thus A1, A2, A3, A4, and A10 constituted the first factor. It is
conceptualized as “ Intrinsic Fund Qualities "(consistent performance and reliability); A5, A7 and A8
constituted the second factor and this is conceptualized as "Credibility of Image"(trustworthy and
reputable, with investor’ s interests at heart); A6, A9 and A11 constituted the 3rd factor and are
conceptualized 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 of
Image) accounts for 17.735% of variance and factor 3 accounts for 16.624% of variance and all 3 factors
together 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, Professional
Investors are those who demand intrinsic fund qualities as their primary requirement before investing in
MF/scheme. Fund performance & reputation, expense ratio, portfolio of investment & load factors are
their core concerns.
Image Conscious Investors: They define those types of investors who attach importance to reputation
and brand name. Reputation of fund manager, credibility & rating by agencies are fund qualities they
would look forward to.
Cautious Investors: These types of investors are generally risk averse and would prefer flexibility in
investment 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 Qualities
Retaining only variables with Eigen Values greater than 0.5, we can infer that 53.441% of variance is
explained by factor 1 and 13.545% of variance is explained by factor 2, both together contributing
66.985%.
A scrutiny of Factor Matrix reveals that factor loadings are very high in case of factor 1(all six variables
have factor loadings>0.5). It reveals that all variables are clubbed into one factor. Therefore, Varimax
Rotation was done to obtain factors that can be named and interpreted. On the basis of Varimax Rotation
with Kaiser Normalisation, 2 factors emerged. Each factor is constituted of all those variables that have
factor loadings greater than or equal to 0.5. Thus B4, B5 and B6 constituted the first factor. It is
conceptualized as "Competent Performance" and B1, B2 and B3 constituted the second factor and this
conceptualized as "Reputation". Thus, after rotation, factor 1 "Competent Performance"(possessing
knowledge, skills and infrastructure for consistent performance.) accounts for 33.761% of variance and
factor 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, known
for its well-knit agency network, topped the 'Top of Mind Recall test’ . This supports the finding that
sponsor'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 these
factors in their fund selection techniques.
Professional Investors: This category of investors identifies Sponsor's past performance, developed
research and infrastructure & money management expertise as essential in Fund Sponsor Qualities.
Image Conscious Investors: Reputation, brand name & developed agency and network of the Sponsoring
firm are the major factors influencing fund selection behaviour of investors.
• Factor Analysis for Investor Related Services
Retaining only variables with Eigen values greater than 1, we can infer that 44.541% of variance is
explained 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 Kaiser
Normalisation revealed the emergence of 2 factors. Each factor is constituted of all those variables that
have factor loading greater or equal to 0.5. Thus C1, C2, C3, C4, C5 & C6 constituted the first factor. It
is conceptualized as "Transparent Disclosure"(willingness to reveal necessary and important
information), C7 & C8 constituted the 2nd factor, which is conceptualized as "Tangibles/Fringe
Benefits"(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 they
account for 63.061% of variance. The identified factors with associated variables and factor loadings are
given in table 6.1.
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Therefore, investors are prominently influenced, in the selection of schemes, by the extent and quality of
disclosure of information subsequent to their investment, regarding disclosure of NAV, portfolio of
investment and disclosure of deviation from the stated objectives and the attached fringe benefits to the
schemes. Hence AMCs should take steps to be transparent and follow the disclosure norms spelt out by
SEBI and AMFI in this connection.
The factors thus extracted have enabled to identify types of investors who give importance to these
factors in their fund selection techniques.
Professional Investors: This category of investors identify Disclosure norms as prescribed by SEBI and
AMFI as significant factors in investor services i.e. Disclosure of investment objectives, periodicity of
valuation, method and periodicity of schemes sales & repurchases, disclosure of NAV on every trading
day & disclosure of deviation of investments from the original pattern. The need for Investor's grievance
redressal 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 solving
problems 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 grievance
redressal machinery or fringe benefits i.e. free insurance, credit cards, loans on collateral or tax benefits
and prefer MFs to avoid bad deliveries & unnecessary follow-up with brokers and companies.
Table 6.1
Results of Principal Component Analysis – Identification of Factors that affect Mutual
Fund/Scheme Selection
% of ex Cumulative
Factor Name Attributes leading at 0.5 or more Loading
var* % of ex.var
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% of ex Cumulative
Factor Name Attributes leading at 0.5 or more Loading
var* % of ex.var
Segmentation of investor groups involves identifying homogenous groups of investors who behave
differently according to their characteristics. The risk capacity of an investor also needs to be understood
thoroughly for classifying investors groups. This categorization provides us with an important piece of
information, regarding individual’ s eagerness towards identifying those fund qualities that influence
MF/Scheme selection. The survey asked the investors to rate their current attitude towards the risky
Financial Instruments, Shares, on a 5-point Likert Scale where 5= Highly Favourable to 1 = Not At All
Favourable. Considering their current attitude, the investors were grouped into 5 types based on their
Risk profile and Expectations. Table 6.2 gives the classification of Investor groups.
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Table 6.2
Classification of Investor Groups
Investor Types Risk Profile Expectations
Professional Takes Necessary Risks Maximum Return
Ambitious Highly Risk Taking High Short Term Returns
Moderate Comfortable Levels of Risk Good, Steady Return
Conservative Risk Averse Regular Income rather than Capital Gains
Cautious 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 25
fund qualities were extracted and subsequently named. Results of PCA- Identification of factors that
affect MF/Scheme selection is given in Table 6.1. An important part of Factor Analysis is to generate
Factor scores for each case or individual survey respondent. Factor/ Component scores reflect the
importance 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 standard
deviation.
MLR technique was employed to seek a relationship between the Factor scores and types of investors, to
indicate statistically important factors that influence the Fund selection behaviour of different types of
investors. The latter acted as the dependent variable in the regression procedure and factor scores were
the 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 in
nature. Given the 5 categorizations for the dependent variable, MLR is simply a polychotonomous
extension of the widely applied dichotonomous logistic regression model. Additionally, MLR permits
independent variables that may be factors or covariates. The covariates must be continuous and that is the
case for the survey respondents A-R Factor scores. Analysis of MLR indicated that, in the order of
importance, Principal Factors 5, 3, 4 and 7 (Table 6.3) are the only statistically significant components
that influence an investor’ s selection of MFs/Schemes.
Table 6.3
Multinomial Logistic Regression Analysis,
Fund Qualities Affecting MF/Scheme Selection vs. Types of Investors
Model Fitting Information
-2 Log
Model Likelihood Chi-Square df Sig.
Intercept Only 255.646
Final 197.509 58.137 28 .001
Pseudo R-Square
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Classification
Predicted
Percent
Observed 1.00 2.00 3.00 4.00 5.00 Correct
1.00 2 0 2 1 0 40.0%
2.00 0 1 0 1 0 50.0%
3.00 0 0 22 10 3 62.9%
4.00 0 0 5 29 5 74.4%
5.00 0 0 7 6 6 31.6%
Overall Percentage 2.0% 1.0% 36.0% 47.0% 14.0% 60.0%
‘Likelihood’ is a probability, specifically the probability that the observed values of the dependent may
be predicted from the observed values of the independent. The log likelihood is its log and varies from 0
to 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 this
study, the ‘ Sig’ value in the ‘ Final’ row in the ‘ Model Fitting Information’ is .001, which proves the
analysis to be a well fitting model. The chi-square statistic is the difference in -2 log-likelihood between
the 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 Mcfadden
psuedo (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” have
proved 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 of
variables have significant influence on the Fund selection behaviour of investors. The AMC can then
apply 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 competent
performance, flexible investment opportunities, reputation and fringe benefits or tangibles, if provided by
the AMC. The 21st century investors look for value added services i.e. personalized attention, tailor-made
investment packages, skills and infrastructure for understanding the needs of a common investor rather
than plain vanilla products. A key question to the marketing managers of MFs is whether they should
concentrate on fund qualities considered commonly important by investors or the dimensions that drive
satisfaction? 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 the
years, have segmented their customers efficiently, built brand and delivered performance, the ongoing
opportunities 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 new
schemes 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 investor
service branches or arrange with other banks to provide over-the-counter redemption facility
across the country through their banking network.
• Mutual fund companies should segment their target customers and position their various
products based on the target segment they propose to address. The target segment can be
broadly divided into institutional segment and individual investor segment. The institutional
segment consisted of treasury departments of Corporate, Trusts etc and suitable products such as
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Institutional Income schemes and Money Market schemes can be targeted at them. The
individual investor can be in turn divided into various segments such as Young Families with
small or no children, Middle-aged People saving for retirement and Retired People looking for
steady income. Suitable products such as Growth and Balanced schemes for young families and
Income schemes with sure and steady returns for retired people can be marketed. By proper
segmentation and by targeting the right product to the right customer, Mutual Fund companies
can 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 plans
on the lines of the 401 K plans, a popular MF product available in the United States. Funds like
UTI and Kothari Pioneer are some of the mutual funds offering full-fledged Pension Plans with
benefit under Section 88. While UTI offers Retirement Benefit Plan, Kothari Pioneer Mutual
Fund offers KP Pension Plan. Retirement schemes similar to 401K plan will attract a large
number 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 go
up from 15 years to 20 years. And the number of the elderly (those over 60) is expected to
increase significantly from 6.8 per cent of the population in 1991 to 8.9 per cent in 2016 and
further to 13.3 per cent by 2026. One of the key recommendations of the expert committee of
Project OASIS (Old Age Social and Income Security) constituted by the government on pension
reforms in 1999 is the creation of a privately managed, individual choice based, voluntary
Pension 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 of
investment options available, MFs are better geared to offer the balanced mix of return, safety
and liquidity to the investors. Negative perceptions about MFs require to be tackled through
appropriate investor education measures. It is suggested that AMFI may set aside a percentage
of membership fee that it collects from the AMCs and create a fund for Investor Education
Programmes. AMC/AMFI/SPONSORS should develop investor education literature specially
tailored 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 financial
education as a benefit to employees. Employers can be objective in hiring an independent
financial 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 advisors
and planners are gaining ground. The US accreditation body for Financial Planners was set up in
Delhi in the name of Association of Financial Planners (AFP) and soon professional Certified
Financial Planners (CFPs) will be available to investors to assist them in their financial planning
needs. Banks are planning to enter into advisory services in a big way. An entirely new
distribution channel can be created consisting of professional advisors who will exert substantial
influence on what products investors will buy.
• E-commerce is gradually showing signs of gaining acceptance and electronic sale of financial
products is especially gaining volumes. There is a likelihood of the volumes reaching a
significant size, thereby spawning a new distribution paradigm. Therefore AMCs should
establish friendlier and easily accessible ‘ Automated Response Systems’ . These systems should
not only effectively convey information on products and services but also efficiently redress
investor grievances.
• Funds should also induce technology that reduces the turnaround time for services like
investments, redemptions and transfers and bring them on par with banks in turnaround time.
• The MF operational environment is becoming more competitive. Hence, the impact of emerging
competition on investor behaviour/behavioural changes needs to be studied further.
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• Developments in technology influence the behaviour of investors. Hence, the impact of
technology 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 into
investor’ s expectations from MF products, its performance, management, service and other
related areas could be done.
• A study is required to examine the trading behaviour of MF investors. Further research can be
done to identify whether MF investors chase past returns or employ a current performance
momentum 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 MFs
purport to offer, namely, diversification benefits and professional management are not
satisfactorily delivered. In spite of this, MF industry is growing and we attribute this to investor
behaviour and other macroeconomic factors. Further research can be done to understand the
reasons for growing popularity on one side and the struggle to win investors’ confidence on the
other side.
8. CONCLUSIONS
THE emergence of an array of savings and investment options and the dramatic increase in the secondary
market for financial assets in the recent years in India has opened up an entirely new area of value
creation 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 a
fixed-income orientation in the Indian culture. Salaried person's savings are most often deposited in
mutual funds; the theory behind 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 volume buying and scientific data analysis, expertise and so on. Therefore it is seen as the
ideal option for an individual who does not have the time, knowledge or experience to make a succession
of judgments involving his hard-earned savings. MF industry in India has a large untapped market in
urban areas besides the virgin markets in semi-urban and rural areas. This market potential can be tapped
by scrutinizing investor behaviour to identify their expectations and articulate investor's own situation
and risk preference and then apply to an investment strategy that combines the usual four: cash and
equivalents, Government-backed bonds, debt, and equity.
Presently, more and more funds are entering the industry and their survival depends on strategic
marketing choices of mutual fund companies, to survive and thrive in this highly promising industry, in
the face of such cutthroat competition. In addition, the availability of more savings instruments with
varied risk-return combination would make the investors more alert and choosy. Running a successful
MF requires complete understanding of the peculiarities of the Indian Stock Market and also the psyche
of the small investor. Under such a situation, the present exploratory study is an attempt to understand
the 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 like
AMFI/SEBI, will help capture the changing perceptions and responses of these groups, and thus provide
early warning signals to enable implementation of timely corrective measures. It is hoped that the survey
findings of the study will have some useful managerial implications for the AMCs in their product
designing, marketing and management of the fund. Results of the study may help in making cost
effective strategic decisions and hence would be of interest to both existing and new MFs; Fund
managers; 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, have
segmented their customers efficiently, built brand, and delivered performance, the ongoing
opportunities to take market share have never been more significant."
***********
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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 to
their very doorstep. The scientific investment approach and investor oriented benefits has made the
industry 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 I
request You to read the following items carefully and answer them. The answers your give will be held
confidential and used purely for academic purpose. Please put a tick mark in the square 5
corresponding your choice. I thank you for your time.
Below 30 5 31 – 40 5 41 – 50 5 Above 50 5
1.6) Occupation:
1.10) What is your current preference of savings avenue? (Rank from 1 first preference to 10
last preference)
2.1) What is your current attitude towards the following Financial Instruments, in the Indian Capital
Market?
a) Shares 5 5 5 5 5
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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?
2.3) Generally you prefer (Please Rank from 1 first preference to 6 last preference)
2.5) You prefer investment in Mutual funds due to (Rank from 1 to 8 down)
Safety 5 Liquidity 5
Flexibility 5 Good Return 5
Capital appreciation 5 Professional Management 5
Tax 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.
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Highly Some what Not very Not at all
Important
Important Important Important Important
b) Sponsor has a recognized
brand name 5 5 5 5 5
2.7) How did you come to know about Mutual fund investment schemes?
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Financial Magazines ---------------
Television ---------------
Brokers / Agents ---------------
Mail ---------------
Stores Display ---------------
2.8) While contacting the fund or trying to get routine / special information would you rather
communicate with a computerized automated response system or a person. (Please tick one
response).
2.9) Do you think Mutual fund investing is a best alternative to equity investing?
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 mark
in the appropriate square
Do Not
Yes No
know
3.5) Bank sponsored Mutual funds give a definite positive return which
5 5 5
is greater than Bank fixed deposits rate for a similar period
3.8) Ups and downs of stock Market will not affect the return from MF.
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.
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ANNEX II
Table A 2.1
Distribution of Individual Investors by Demographic Factors
Number of Respondents
Investor Particulars
Total (100) (%)
Sex Male 84 84
Female 16 16
Age Below 30 27 27
30 – 40 27 27
41 – 50 20 20
Above 50 26 26
Post Graduate 20 20
Professional 32 32
Unmarried 23 23
Occupation Professional 12 12
Business 3 3
Salaried 77 77
Retired 8 8
Rs.1,00,000 – Rs.3,00,000 50 50
Rs.3,00,000 – Rs.5,00,000 28 28
Above Rs.5,00,000 15 15
Rs.50,001 – Rs.1,00,000 43 43
Above Rs.1,00,000 17 17
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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, Columbia
Business School, 1993.
Gupta, L.C., Mutual Funds and Asset Preference, Society for Capital Market Research and
Development, Delhi, 1994.
Kiran D. and Rao U.S., “ Identifying Investor Group Segments Based on Demographic and
Psychographic Characteristics” , MBA Project Report, Sri Sathya Sai Institute of Higher Learning, 2004.
Madhusudan V. Jambodekar, Marketing Strategies of Mutual Funds – Current Practices and Future
Directions, 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 and
Investor 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 special
reference to Kothari Pioneer Mutual Fund” , Project Report, Sri Srinivas Vidya Parishad, Andhra
University, 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.
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 Trading
Performance? Evidence from China”, John_nofsinger@wsu.edu , 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.
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