An Empirical Study of Investment Pattern of Retail Investors in Mutual Funds

Transcription

1 An Empirical Study of Investment Pattern of Retail Investors in Mutual Funds 1 Dr. T.V. Raman and 2 Ms. Kanan Budhiraja, 1 Associate Professor, 2 Research Scholar, 1,2 Department of Accounting and Finance, Amity Business School, Noida, India Abstract: India is experiencing a phase of savings and investment, especially with the growth spurt in its working class. The study aims to identify the pattern of investment of retail investors with special emphasis on mutual fund industry. It is notable to find that, though investment in physical assets is still the most desirable, investment in equity instruments and mutual funds is on the rise. The findings of the study indicate that investors age plays a vital role in the difference in the risk appetite. Moreover, while both males and females are equally placed on their factors for selection of mutual funds, males place the brand image as least influencing while females place liquidity of investment in the same category. Also, a comparison of the investors age with the factors affecting investment decision reveals that those below the age of 40 place most amount of importance to a high return on investment while those above the age of 60 prefer investments that have a lower category of risk even if that means a smaller return. Those between the ages of 50 to 60 are placed equally for risk and return on investment. The regulatory changes in the mutual fund industry and the increase in financial literacy and awareness of investors will go a long way in encouraging investment in the country. Keywords: Investment, Retail Investors, Mutual Funds, Risk, India I. INTRODUCTION Investment is a deferred consumption or saving that involves employing funds in financial or physical assets with the aim of earning profitable returns in terms of income, interest or capital appreciation. The two important attributes of any investment are risk and time. An asset is bought with the anticipation that some return will be received from it in the future. Thus, any investment has an associated risk of loss of the principal sum invested. The sacrifice that has to be borne by an investor is certain but the return in the future is uncertain. The main objective of an investment is to increase the rate of return and reduce the risk. Other objectives like safety, liquidity, and hedge against inflation are subsidiary in nature. A wide array of investment instruments is available to an investor. Sacrificing some rigor, these may be classified as follows: 1. Non-Marketable Financial Assets: A good portion of financial assets is represented by nonmarketable financial assets. These can be classified into the following broad categories: i. Bank Deposits ii. Post Office Deposits iii. Company Deposits iv. Provident Fund Deposits 2. Equity Shares Equity shares represent ownership capital. This essentially means that an equity shareholder has a residual interest in income and wealth. 3. Money Market Instruments Debt instruments that have a maturity of less than one year at the time of issue are called money market instruments. Commercial paper, certificates of deposit, treasury bills are all a part of money market instruments. 4. Debt Instruments Debt instruments protect the capital and hence, stress the importance of a solid debt portfolio. These not only give stability, but also offer optimal returns, liquidity and tax benefits. 5. Bonds Bonds are long-term debt instruments wherein the issuer promises to pay a stipulated stream of cash flows. Bonds may be classified into the following categories: i. Government Securities ii. Government Agency Securities iii. Debentures of Private Sector Companies iv. PSU Bonds 6. Precious Commodities Precious commodities refer to items that are generally small in size but highly valuable in monetary terms. Gold and silver, precious metals, and art objects can be classified as precious commodities. 7. Mutual Funds Investment companies or trusts obtain funds from a large number of investors through sale of units. The funds thus collected, are placed under professional management for the benefit of the investors. Each unit of fund held by an investor is called a mutual fund unit. 8. Life Insurance Life insurance is a contract for payment of a sum of money to the person assured n the happenings of event insured against. Among other things, the contract also provides for the payment of premium periodically to the corporation by the policy holders. It eliminates risk. 9. Real Estate For the bulk of investors, the most important asset in their portfolio is a residential house. In addition, more affluent investors are likely to be interested in agricultural and semi-urban land as modes of investment. Available Online@ 325

2 10. Financial Derivatives A financial derivative is an instrument whose value is derived from the value of an underlying asset. These may include forwards, futures and options. Figure 2: Allocation of Savings to Different Investment Avenues by Indian Investors Source: Karvy Private Wealth Report, Economic Times Even with the plethora of investment avenues that are available to Indian investors, not all of them find a good market with them. Those investors who have surplus funds to invest prefer putting it into real estate and gold as compared to investment in the capital markets. The primary reason for this is the cultural background that considers gold and property as safer investment avenues rather than a volatile capital market. Indians, even now, predominantly invest in physical assets instead of financial assets. As can be seen from the figure, majority of Indian investors prefer investing in gold and real estate and it is still considered a safe bet. Mutual Funds are not a preferred investment source with only about 1.2% investors investing in it during the year. Figure 1: Investing Pattern: World vs. India Source: Karvy Private Wealth Report, Economic Times When we look at the investing pattern of India compared to the rest of the world, we find that the investment in equity class is lower than the world average. This is likely to increase in the future with more and more people putting their trust in the stock market. Also, it is notable to see that though the debt investment is similar to the rest of the world, our investment in alternative assets is extremely high. This is primarily due to the fact that this category includes gold in the share of total wealth. Investors can be broadly classified into the following two categories: 1. Institutional Investors An institutional investor is a person or an organization that invests large amount of money in stocks and other investment avenues that qualifies them for preferential treatment over other investors and lower commissions than usual. These investors are financially sophisticated, more knowledgeable and often hold a very large portfolio of investments. They also face fewer protective regulations since it is assumed that they are knowledgeable and have such resources at disposable that they will be able to protect themselves from volatility in the market. Pension funds, mutual fund companies, life insurance companies are all a part of institutional investors. 2. Retail Investors Retail investors are individual investors who buy stocks or investments for their own personal account and not for any other organization or end user. The amount of investment is very low as compared to institutional investors and so is the knowledge base. These investors generally rely on their brokers or analysts to guide them in making an informed decision regarding the purchase of a security. As such, retail investors may let the institutional investors manage their portfolio by investing in mutual funds, retirement funds, hedge funds and the like. A mutual fund is a type of investment in which investors pool their money to invest in a variety of securities that is professionally managed by an Asset Management Company (AMC). The securities for investment could include stocks, shares, bonds, government securities, cash and/or other securities. The investors receive units of the mutual fund and not of the securities in which the pooled investment is made. A variety of mutual fund options are available to retail investors based on two classifications: 1. Capitalization Depending on whether the units are limited or not, fund schemes can be classified as: a. Open-Ended Schemes (Unlimited number of mutual fund units) Available Online@ 326

3 b. Close-Ended Schemes (Limited number of mutual fund units) 2. Investment Mutual Funds invest in various securities based on a specific objective such as capital appreciation, fixed income, tax benefits, liquidity of capital, and safety of principal and so on. Based on these specific objectives, the various funds can be divided as: a. Growth Funds (Capital appreciation with low current income) b. Balanced Funds (Provides income as well as growth in capital) c. Fixed Income Funds (Maximise current income with capital preservation) d. Money Market Funds (Stability of income and liquidity of investment) e. Sector Funds (Diversification in specific sectors and industries) The Asset Management Company charges a fee from the investors for diversifying their amounts into a portfolio of securities and managing that portfolio from time to time in order to fulfil the objectives of the fund. The Securities and Exchange Board of India (SEBI) regulates the mutual fund industry in India. II. REVIEW OF LITERATURE (Kumar & M.C. Lee, 2006) Used a database of more than 1.85 million retail investors and studied their transactions to find out that individuals transactions are correlated. They find that return co-movements for stocks that have high retail concentration can be explained by systematic retail trading. Their findings conclude that investor sentiment plays a huge role in return formation. (Das, Mohanty, & Shil, 2008) Studied the behaviour of investors in selection of mutual funds and life insurance policies as a mode of investment by making a comparative study in the Indian context. They concluded that the differences in age and education level of the investor impact the selection of the investment avenue. (Chandra & Kumar, 2012) Concluded that investor behaviour is influenced by a variety of psychological heuristics and biases by documenting survey data from 350 individual investors. Their findings underline an asymmetric pattern of information distribution and usage among investors which impacts their investment behaviour to a large extent. (Praba, 2011) Revealed that investors give priority to self decision in investment planning. Most of the investors are influenced by external factors like psychological and sociological factors and the unawareness and fear of loss is the major detriment to investment in mutual funds. Also, according to the research most working people do not plan for their future with savings and investment and are of the belief that current savings will be enough for their post retirement needs. (Shah, Zanwar, & Deshmukh, 2011) Used a database of 403 people from 13 villages to examine the life cycle stages and their impact on investment preference and the objectives of investment on rural investors. The study finds that mutual funds, ELSS, Precious stones, art objects and the like are the most neglected investment avenues by the rural investors. They generally prefer Post Office Savings schemes and Bank deposits as they are considered to be relatively safe for investment. (Shollapur & Kuchanur, 2008) Attempted to measure the degree of investors agreeableness with the selected perceptions as well as to trace the gaps between their perceptions and the underlying realities. The gap analysis done by the researchers show that corporate securities are less preferred, government securities do not provide with a steady income, bank deposits require transaction costs which are not considered by some investors, etc. Hence, there is a need to help the investors develop the right perspective and bridge the gap between their understanding of the investment avenues and the reality of it. (Sireesha & Laxmi, 2013) Researched the impact of demographics on the investment avenues that are selected by investors in the cities of Hyderabad and Secunderabad. They found that gender, age, and peer group influence the investment decision and also investors are less concerned about money multiplication and liquidity but want their money to be secure and risk free. (Paul & Bajaj, 2012) Carried the study in order to find whether an association exists between the level of awareness of equity investors and their demographic profile. While analysing a sample of 200 respondents, the study pointed out that most existing equity investors only possess a moderate level of understanding of the market. Also, the age and gender of the investors is not significantly associated with the level of awareness of investors while the income level and occupation are significantly associated with the awareness levels. Available Online@ 327 III. OBJECTIVES OF THE STUDY The research objective of the study is to analyse the preferences of investment avenues of retail investors and also to find the factors influencing investors before selection of the preferred avenue. The study aims to reflect on investors risk appetite and the factors affecting their investment decision for investment in mutual funds. IV. RESEARCH METHODOLOGY The design of the proposed study aims to analyse the preferential investment avenue of retail investors and the use of demographical analysis to allocate these preferences through the use of primary data. For the purpose of research, a diversified sample of 100 respondents was given a structured questionnaire that addressed the objectives of the study. Selection of the sample was done through convenience sampling technique. The questionnaire itself was divided into two parts Part A dealt with the Investor Attitudes and Preferences while Part B was concerned with the Investor Profile. Software Package for Social Sciences (SPSS) has been used to analyse the data collected. The objectives have been examined with the help of Descriptive Statistics, Chi-Square and Kruskal Wallis-H Test. V. ANALYSIS AND INTERPRETATION 1. Demographic Summary The investment preference of the retail investors has been classified on the basis of several socio-economic

4 variables and some selective investment profile factors i.e.: a. Age Group b. Education c. Occupation d. Annual Income e. Gender f. Risk Appetite g. Investment Experience Out of the total sample size of 100 investors, 59 are male and 41 are female investors. Since the working young class of India has magnified over the, the study represents a majority of investors that are less than 30 old with 48% of the respondents falling in this category. Most of the respondents are well read and knowledgeable with 38% Graduate and 57% Post Graduate investors in the mix. The occupation of the investors was classified under the heads of Student, Business, Salaried, Retired and Homemaker. Maximum number of respondents in the study is from the salaried class of retail investors. The annual income of investors has been classified as Less than Rs. 2 lakhs, Between Rs. 2 lakhs to Rs 5 lakhs, Between Rs. 5 lakhs and Rs. 10 lakhs and More than Rs. 10 lakhs. A majority of the investors are in the income group of more than Rs. 10 lakhs annually. Also, the risk appetite of the investors was divided into very low, low, moderate, high and very high. It is not surprising to note that none of the investors fall in the very high category. Majority of the investors have moderate risk capacity while those falling into the low risk category come a close second. The investors experience in terms of exploring and investing in the various alternatives was also analysed. Lack of proper knowledge and unawareness of avenues available is the reason why only 7% of the investors are experienced in investing. However, with the increase in technology usage, 45% of the investors have some experience in investing in the equity markets and have bought and sold shares at some point. The distribution is as follows: Table 1: Distribution of Sample Data S.No. Factors Sub Factors i. Below 30 ii Age Group iii iv v. Above 60 Number of Investors Education 3 Occupation 4 Annual Income 5 Gender 6 Risk Appetite i. Senior Secondary ii. Graduate iii. Post Graduate iv. Doctorate i. Student ii. Business iii. Salaried iv. Retired v. Homemaker i. Less than 2 lakh ii. Between 2 lakh to 5 lakh iii. Between 5 lakh to 10 lakh iv. More than 10 lakh i. Male ii. Female i. Very Low ii. Low iii. Moderate iv. High v. Very High Investment Experience i. Beginner ii. Moderate iii. Knowledgeable iv. Experienced Available Online@ 328

5 2. Behavioural Analysis i. Analysis for Investors Perceptions and Attitudes in General a. Average Score Analysis The factors affecting investment decision have been analysed with the help of average score analysis. The respondents age were compared to the factors that played an important role in their investment decision to find the factor that most affects decision making. The results are displayed in the following table: Table 2: Mean Score Analysis of Age vs. Factors affecting Decision Making Age Group Rate of Return Risk Involved Past Performance Government Policy Inflation Initial Requirement of Fund Below Above Total Table 2 reveals that for almost all the age groups, the rate of return associated with the investment option is the most important factor in consideration. For those people who fall in the age category of 50 60, the rate of return offered as well as the risk associated with that return holds equal importance in choosing the instrument. However, for those above the age of 60, the risk involved with the What is your risk appetite for investment? investment avenue is marginally more important than the return offered on the same. b) Chi-Square To test the significance of association between various classes of investors based on their age group and education level and the risk appetite of the investors. Age Group Table 4: Crosstabs of Risk Appetite for Investment and Investors Age Group Age Group Below Above 60 Very Low Low Moderate High Total Total Table 5: Chi-Square Tests Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases 100 The above two tables display the results of the test of association of the risk appetite of investors with their age group. As can be seen, the significance value of Pearson Chi-Square is which is less than the p-value of 0.05 at df Asymp. Sig. (2- sided) a confidence level of 95%. Thus, the null hypothesis is rejected and it is accepted that there is an association between the risk appetite of investors and the age group they belong to. Table 6: Symmetric Measures Value Approx. Sig. Nominal by Nominal Phi Cramer's V N of Valid Cases 100 Available Online@ 329

6 Phi and Cramer s V test the strength of the association. As can be seen from the values, the strength of the association between the variables is quite high. Education Table 7: Crosstabs for Risk Appetite for Investment and Investors Education Level What is your risk appetite for investment? Education Senior Secondary Graduate Post Graduate Doctorate Very Low Low Moderate High Total Total Table 8: Chi-Square Tests Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases 100 df Asymp. Sig. (2- sided) The above two tables display the results of the test of association of the risk appetite of investors with their level of education. As can be seen, the significance value of Pearson Chi-Square is which is more than the p-value of 0.05 at a confidence level of 95%. Thus, the null hypothesis is accepted and it can be said that there is no association between the risk appetite of investors and their level of education. Table 9: Symmetric Measures Value Nominal by Nominal Phi Cramer's V N of Valid Cases 100 Approx. Sig. Again, as can be seen from the values of Phi and Cramer s V the strength of the association between the variables is high. a. Average Score Analysis ii. Analysis of Investors Perceptions and Attitudes towards Mutual Funds - Gender and Factors affecting Mutual Fund Investment Decision The importance that investors put on certain factors before taking an investment decision in mutual funds have been compared on the basis of their gender through average score analysis. Table 10: Mean Score Analysis of Gender vs. Factors Influencing Investment in Mutual Funds Gender Liquidity High Return Professional Management Diversification Brand Image Price Risk Male Female Total Available Online@ 330

7 The mean scores of the males and females reveal that obtaining a high return on the investment is the strongest influence for both males and females while investing in mutual funds. On the other hand, a strong brand image of the mutual fund has the least amount of influence for males as an investment factor. For females, it is the liquidity of investment that holds the least importance as a factor for consideration while investing in mutual funds. b) Kruskal Wallis-H Test The Kruskal Wallis-H test has been used to test the whether there is a significant difference in the mean scores of the males and females for the various factors under consideration before choosing a mutual fund investment. Hypothesis: There is no significant difference in the influence of the factors under consideration on males and females while investing in mutual funds. Table 11: Significance of Factors Influencing Investment in Mutual Funds S.No. Influencing Factor Chi-Square P-Values Significance Values 1 Liquidity Significant 2 High Return Not Significant 3 Professional Management Not Significant 4 Diversification Not Significant 5 Brand Image Significant 6 Price Not Significant 7 Risk Not Significant The test reveals that the hypothesis is rejected in two cases and accepted in five. Thus, it can be said that there is a significant difference in the level of influence that liquidity of investment and brand image of the mutual fund have on the decision to invest in mutual funds based on the gender of the investor. However, the gender of investor does not impact the influence of other factors while investing and there is no significant difference in their influence between different classes of investors. CONCLUSION The study has brought to light the differences in the patterns of investment among various classes of investors based on demographical differences. It re-affirms the fact that the age group of an investor determines his risk appetite and ultimately, his choice of investment. This is largely due to the fact that the motivation to invest changes with the life cycle stage the person is at. Those nearing old age and retirement prefer to look for safer investment instruments and have a low risk appetite since the level of income becomes constant or falls. On the other hand, the youth today are experimenting with new products and have a moderate risk appetite even while planning for the future. As a result of the financial meltdown of the last decade, the global economy has slowed down. This has naturally impacted the Indian financial industry as well since investors have become more cautious with their finances and investments. Investors have become risk averse and are their confidence is dwindling in expecting a return on their investment. The slowdown in the Banking and Financial Services industry (BFSI) trickled down to almost all the business sectors. However, even with the financial breakdown, the Indian mutual fund industry saw an absolute growth of almost 50% from 2007 to This growth rate, though slowed down to 12% (as reported in March 2012) again rose to about 23% in the year ending March The mutual fund industry, during this entire period of slowdown, still managed to deliver a positive alpha. The main reason for this can be attributed to the strict regulatory environment of the country which provided a cushion to the Indian BFSI from a huge fall. Even with all the growth spurts that the industry has seen in the past few, there has been erosion in the investor base and the industry faces several challenges as it moves ahead. India consists of an untapped market since the population is largely unbanked and efforts into financial inclusion have not had the desired impact. With the low level of banking services and financial penetration, a majority of the population still invests in real estate and gold. The mutual fund industry in the country has a lot to explore and look forward to. Despite the challenges it faces in terms of lack of awareness and low financial literacy, there is a growing importance of the industry with the increase in the youth population and the working class of the country. With the slew of regulatory changes that have been brought in, the industry is looking towards a lot of positive change. The industry needs to broaden its horizon, increase penetration levels and improve the levels of financial literacy. All this, combined with the growth in the Indian economy, gives a positive outlook for the industry. RECOMMENDATIONS Keeping in mind that age group plays an important role in the risk appetite of investors and that India has a continuously growing young working class, it is only natural that the investment advisors design instruments that focus on maximising returns with moderate risk levels. Also, there is a growing need to increase investor awareness and literacy. Implementing programs that focus on educating and simplifying the role of various investment avenues, specially for the rural working class, will help increase the foothold of mutual fund companies. The benefit of SIPs (Systematic Investment Plans) needs to be explored and communicated to those who cannot afford to invest large sums of money. Community programs, the likes of e-choupal, can be experimented with and administered to expand the footprint of mutual funds in the country. LIMITATIONS OF THE STUDY Although great care has been taken to make sure that the study is comprehensive and relevant, it is important to note Available Online@ 331

8 that there are several limitations which may have a potential impact on the finding of the study. Since the sample selection has been done through convenience sampling technique and only a sample of 100 respondents has been selected, it is difficult to generalise these findings to the larger population. Also, errors in questionnaire development and data entry may have projected an image that is different from the original scenario. Journal Articles: References [1] Chandra, A., & Kumar, R. (2012). Factors Influencing Indian Individual Investor Behavior: Survey Evidence. Decision, XXXIX (3), [2] Das, D. B., Mohanty, S., & Shil, N. C. (2008). Mutual Fund vs. Life nsurance: Behavioral Analysis of Retail Investors. International Journal of Business and Management, III (10), [3] Kumar, A., & M.C. Lee, C. (2006). Retail Investor Sentiment and Return Comovements. The Journal of Finance, LXI (5), [4] Paul, T., & Bajaj, S. (2012). Influence of Demographic Profile of Equity Investors on Their Level of Awareness about Equity Market. The International Journal of Management, I (4), [5] Praba, R. (2011). Investors' Decision Making Process and Pattern of Investments - A Study of Individual Investors in Coimbatore. SIES Journal of Management, VII (2), [6] Shah, V., Zanwar, P., & Deshmukh, P. (2011). Stages in Life Cycle and Investment Pattern of Rural Invesotrs - A Case Study. BVIMR Management Edge, IV (2), [7] Shollapur, M. R., & Kuchanur, A. B. (2008). Identifying Perceptions and Perceptual Gaps: A Study of Individual Investors in Selected Investment Avenues. The Icfai University Journal of Behavioral Finance, V (2), [8] Sireesha, P. B., & Laxmi, C. S. (2013). Impact of Demographics on Select Investment Avenues: A Case Study of Twin Cities of Hyderabad and Secunderabad, India. International Journal of Marketing, Financial Services & Management Research, II (6), Reports: [9] Mehra, G., & Kalia, A. (2013). Indian Mutual Fund Industry: Unearthing the Growth Potential in Untapped Markets. Mumbai: Confederation of Indian Industry and PwC. [10] Purandare, J., & Mehra, G. (2010). Indian Mutual Fund Industry - Towards 2015: Sustaining Inclusive Growth - Evolving Business Models. Mumbai: Confederation of Indian Industry and PwC. Available Online@ 332