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N. Rajamurugan II MBA 9910115047

Study on Factors influencing the selection of mutual funds by retail investors in Chennai

Abstract

MF is a retail product designed to target small investors, salaried people and others who are intimidated by the mysteries of stock market but, nevertheless, like to reap the benefits of stock market investing. At the retail level, investorsare unique and are a highly heterogeneous group. Hence, their fund/schemeselection also widely differs. Investors demand inter-temporal ealth shifting ashe or she progresses through the life cycle. This necessitates heAssetManagement Companies (AMCs) to understand the fund/scheme selection/switching behaviour of the investors to design suitable products to meet the changing financial needs of the investors. With this background a survey was conducted among 300 Mutual Fund Investors in 10 Urban and Semi Urban centers to study the factors influencing the fund/scheme selection behaviour of Retail Investors. This paper discusses the survey findings. It is hoped that it will have some useful managerial implication for the AMCs in their product designing and marketing.

Objectives:
To identify the features the investors look for in Mutual Fund products To identify the information sources influencing the selection of schemes To identify the sponsor qualities preferred by retail investors To identify the preference of investors towards services of sponsors

Review of Literature
The existing Behavioural Finance studies are very few and very little information is available about investor perceptions, preferences, attitudes and behaviour. All efforts in this direction are fragmented. Ippolito (1992) says that fund/scheme selection by investors is based on past performance of the funds and money flows into winning funds more rapidly than they flow out of losing funds.

Goetzman (1997) states that there is evidence that investor psychology affects fund/scheme selection and switching.
De Bondt and Thaler (1985) while investigating the possible psychological basis for investor behaviour, argue that mean reversion in stock prices is an evidence of investor over reaction where investors overemphasise recent firm performance in forming future expectations.

In India, one of the earliest attempts was made by NCAER in 1964 when a survey of households was undertaken to understand the attitude towards and motivation for saving of individuals. Another NCAER study in 1996 analysed the structure of the capital market and presented the views and attitudes of individual shareholders. SEBI NCAER Survey (2000) was carried out to estimate the number of households and the population of individual investors, their economic and demographic profile, portfolio size, investment preference for equity as well as other savings instruments. This is a unique and comprehensive study of Indian Investors, for, data was collected from 3,00,0000 geographically dispersed rural and urban households. Some of the relevant findings of the study are : Households preference for instruments match their risk perception; Bank Deposit has an appeal across all income class; 43% of the non investor households equivalent to around 60 million households (estimated) apparently lack awareness about stock markets; and, compared with low income groups, the higher income groups have higher share of investments in Mutual Funds (MFs)

signifying that MFs have still not become truly the investment vehicle for small investors. Nevertheless, the study predicts that in the next two years (i.e., 2000 hence) the investment of households in MFs is likely to increase. We have to wait and watch the investors reaction to the July 2nd 2001, great fall of the Big Brother,UTI. (Note : Behaviour is a reaction to a situation. So as situation changes, behaviour gets modified. Hence, findings and predictions of behaviour studies should be viewed accordingly).

Gupta (1994) made a household investor survey with the objective to provide data on the investor preferences on MFs and other financial assets. The Findings of the study were more appropriate, at that time, to the policy makers And mutual funds to design the financial products for the future. Kulshreshta (1994) offers certain guidelines to the investors in selecting the mutual fund schemes. Shanmugham (2000) conducted a survey of 201 individual investors to study The information sourcing by investors, their perceptions of various investment strategy dimensions and the factors motivating share investment decisions, and reports that among the various factors, psychological and sociological factors dominated the economic factors in share investment decisions.

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

income are the two important determinants in the selection of the fund/scheme; brand image and return are the prime considerations while investing in any Mutual Fund. Anjan Chakarabarti and Harsh Rungta (2000) stressed the importance of brand effect in determining the competitive position of the AMCs. Their study reveals that brand image factor, though cannot be easily captured by computable performance measures, influences the investors perception and hence his fund/scheme slection. Shankar (1996) points out that the Indian investors do view Mutual Funds as commodity products and AMCs, to capture the market should follow the consumer product distribution model.

Since 1986, a number of articles and brief essays have been published in financial dailies, periodicals, professional and research journals, explaining the basic concept of Mutual Funds and highlight their importance in the Indian capital market environment. They touch upon varied aspects like Regulation of Mutual Funds, Investor expectations, Investor protection, Trend in growth of Mutual Funds and some are critical views on the performance and functioning of Mutual Funds.

A few among them are Vidyashankar (1990), Sarkar (1991), Agarwal (1992), Sadhak (1991), Sharma C. Lall (1991), Samir K. Barua et al., (1991), Sandeep Bamzai (2001), Atmaramani (1995), Atmaramani (1996), Subramanyam (1999), Krishnan (1999), Ajay Srinivsasn (1999). Segmentation of investors on the basis of their characteristics was highlighted by Raja Rajan (1997). Investors characteristics on the basis of their investment size Raja Rajan (1997), and the relationship between stage in life cycle of the investors and their investment pattern was studied Raja Rajan (1998).

From the above review it can be inferred that Mutual Fund as an investmen vehicle is capturing the attention of various segments of the society, Like academicians, industrialists, financial intermediaries, investors and regulators for varied reasons and deserves an indepth study. In this paper, an attempt is made by the author, mainly to study the factors which influence the investors in their selection of the fund/scheme. Sujit Sikidar and Amrit Pal Singh (1996) carried out a survey with an objective to understand the behavioural aspects of the investors of the North Eastern region towards equity and mutual funds investment portfolio. The Survey revealed that the salaried and self employed formed the major investors In mutural fund 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 survey was done.

Syama Sunder (1998) conducted a survey to get an insight into the mutual Fund operations of private institutions with special reference to Kothari Pioneer. The survey revealed that awareness about Mutual Fund concept was poor during that time in small cities like Visakapatnam. Agents play a vital role in spreading the Mutual Fund culture; open-end schemes were much preferred then; age and

Research Methodology

Type of research: Descriptive study Data Collection: Sources : Primary data are collected from the mutual fund investors in Chennai and Secondary data from websites, journals andtext books. Population size Sample size Sampling methods Data Collection Approach Data Collection Instrument Data Analysis : Unknown : 300 retail investors in mutual funds : Convenience Sampling : Personal Interview : Questionnaire : Chi-square Analysis, Binomial, Ks test, Factor Analysis, t-Test