CHAPTER VII PERCEPTION OF MUTUAL FUND INVESTORS

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1 CHAPTER VII PERCEPTION OF MUTUAL FUND INVESTORS 7.1. Introduction A mutual fund collects the savings from small investors, invest them in Government and other corporate securities and earn income through interest and dividends, besides capital gains. It works on the principle of a small drop of water can make a mighty ocean. Hence, a mutual fund is nothing but a form of collective investment. It is a group of various investors coming together who transfer their surplus funds to a professionally qualified organization to manage it. To get the surplus funds from the investors, the fund adopts a simple technique. Each fund is divided into a small fraction called units of equal value. Each investor is allocated units in the proportion to the size of his investment. Thus, every investor, whether big or small, will have a stake in the fund and can enjoy the wide portfolio of the investment held by the fund. Hence, mutual funds enable millions of small and large investors to participate in and derive the benefit of the capital market growth. It has emerged as a popular vehicle of creation of wealth due to high return, lower cost and diversified risk.

2 187 The fund mobilization by mutual funds in India has been increased since their inception in i.e., with the launch of US 64 flagship scheme of UTI. Again it was in 1987 and 1989, when public sector banks and corporations entered in the mutual funds market. Further keeping in tune with the objective of new economic policy of 1991, mutual funds market was thrown open to private sector in India. Since 1993, the investment trend shifted in favour of private sector funds. The corpus of mutual funds crossed Rs crores marks in India. In November 2002 with almost 60 per cent of the total investment going into private sector mutual funds. Today as on March 31 st 2010, the total AUM is crores 1. The fact that the money so invested comes out of the hard earnings of investors apparently bring home the direct need of studying what the investors feel about mutual funds. In this chapter an attempt has been made to study the perceptions of investors towards mutual funds. It includes the analysis of knowledge of investors, awareness and reasons for withdrawal of mutual fund units Knowledge about Mutual Funds It represents the investors knowledge on mutual funds. Investors who invest their money into mutual fund must have some knowledge about their investment. Blank investment always gives negative results. The investor with high knowledge may have its own influence to select the type of mutual funds and also the time of buying and selling of mutual funds in the market. So a mutual fund investor should have the basic knowledge about mutual funds like the nature of mutual fund, how it works, how the money is turned into returns, 1.

3 188 what are the parties involved in this operations, how the value is calculated etc. Then only the investor can successfully involve in the field and make necessary changes to earn good returns. In this study the investor s knowledge level is analysed by the use of t-statistics. TABLE 7.1 KNOWLEDGE ABOUT MUTUAL FUNDS AMONG THE INVESTORS S. Knowledge on Mean Score among Investors T-Statistics No. Small Large 1 Type of funds * 2 Fund s investment * Objective 3 Portfolio of the fund * 4 Portfolio manager * 5 Net Asset Value * 6 Lock in Period * *significant at five percent level. Source: Primary data. The table 7.1 indicates the mean score of the knowledge of investors among the two group of investors and the respective t statistics. The small investors have good knowledge about type of funds and lock in period since their respective mean scores are and Among large investors, they have good knowledge on fund s investment objective and type of funds since their respective mean scores are and Regarding the knowledge of mutual fund investors, the significant difference among the small and large investors have been identified in type of funds, fund s investment

4 189 objective, portfolio of the fund, portfolio manager, net asset value and lock in period since the respective t statistics are significant at five percent level Awareness of Investors It represents the awareness level of mutual fund investors. Indian investors are not much aware of mutual funds. As per the survey of CAMS in major cities, the survey results shows that, the awareness is weak, considering especially the percentage of households that invest today, there is less than 50 per cent awareness of funds 2. Awareness is the highest in the metros where nearly half of all savers know about mutual funds 3. Most of the mutual fund companies along with the Association of Mutual Funds in India (AMFI) have started investor awareness programme. UTI mutual fund this year launched one of the largest investor education initiatives under the name Swatantra for creating awareness about the concepts of financial planning and benefits of investing in mutual funds in over 300 cities in the country. This study analyses the awareness level of investors with the help of t test. 2. Vetrivel R., (2007), Awareness on Mutual Fund Investments Weak, The Hindu-Business Line, Aug14, htm. 3. Vijaya Rathore, (2008), Low Awareness of Mutual Funds Snags AMCs Bid to Expand Base, Livemint - The Wall Street Journal /08/ / Low-awareness-of-mutual-funds.html

5 190 TABLE 7.2 LEVEL OF AWARENESS ON THE TERMS IN MUTUAL FUND MARKET Mean Score among S. Terms Investors T-Statistics No. Small Large 1 New Fund Offer(NFO) * 2 Systematic Investment Plan (SIP) 3 Systematic Withdrawal Plan (SWP) * * 4 Asset Management Company * 5 AMFI * 6 Exchange Traded Fund * 7 Key Documents * 8 Systematic Transfer Plan (STP) * 9 SEBI * 10 ELSS * Overall * *significant at five percent level. Source: Primary data. The small investors are much aware of Systematic Investment Plan (SIP), ELSS and AMFI since its means scores are , and respectively. Among large investors, they are having good awareness about Systematic Investment Plan (SIP), NFO and AMFI since its mean score of , and respectively. Regarding the level of awareness, the

6 191 significance difference among the small and large investors have been identified in the case of New fund offer (NFO), Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), Asset Management Company, AMFI, Exchange Traded Fund, Key Documents, Systematic Transfer Plan (STP), SEBI, and ELSS since their respective t statistics are significant at five per cent level Perception on Mutual Funds It means the investors perception about mutual funds different aspects. The perception may differ from investor to investor. Seventeen variables are selected from different areas to analyse the perception of investors. Investors are asked to rate the above said funds at five point scale according to their perception. These statements were framed considering the developments in mutual fund industry over time. The means score of each statement have been computed to exhibit the opinion of mutual funds among the two types of investors. The results are summarized in Table.7.3.

7 192 TABLE 7.3 PERCEPTION ON MUTUAL FUNDS S. No. Variables Related to Mutual Funds 1 Mutual Funds are useful for small investors 2 Mutual Funds give higher return than other investments 3 Mutual Funds are healthy for Indian financial environment 4 Private sector mutual funds are not good 5 ELSS schemes are good for tax saving 6 Mutual funds with large corpus perform better 7 Mutual funds having diversified portfolio gives better returns 8 Close ended mutual funds are not good 9 Mutual Funds with high NAV is good for investment 10 Public sector mutual funds are safe 11 Mutual Fund investment is an asset for future 12 Mutual fund investments are the substitutes for share investment 13 New Fund offers are good than existing fund 14 Growth option is good for long term 15 Dividend payout option is good in tax saving schemes 16 Bearish market is good for investment 17 Bulky investment is not advisable in bullish market *Significant at five percent level. Source: Primary data. Mean Score among Investors T-Statistics Small Large * * * * * * * * * * * * *

8 193 Among small investors, majority of them accept the perception, mutual funds are useful for small investors, and mutual funds are healthy for Indian financial environment and public sector mutual funds are safe since their respective mean score of , and The large investors favoured opinion are mutual funds with large corpus perform better, mutual funds with high NAV is good for investment and Mutual Fund investment is an asset for future since their respective mean score of , and Regarding the opinion, the significant difference among the two group of investors have been identified in the case of Mutual Funds give higher return than other investments, Mutual Funds are healthy for Indian financial environment, ELSS schemes are good for tax saving, Mutual funds with large corpus perform better, Mutual funds having diversified portfolio gives better returns, Mutual Funds with high NAV is good for investment, Public sector mutual funds are safe, Mutual fund investments are the substitutes for share investment, New Fund offers are good than existing fund, Growth option is good for long term, Dividend payout option is good in tax saving schemes, Bearish market is good for investment and Bulky investment is not advisable in bullish market since the respective t statistics are significant at five percent level Factor Analysis To study the investors perception about important aspects in mutual fund, factor analysis is used. The score of the investors opinion about mutual fund have been included for the factor analysis. The rotated component matrix for the various investment options is given in Table 7.4.

9 194 S. No TABLE 7.4 ROTATED COMPONENT MATRIX FOR INVESTORS OPINION Variables Mutual Funds with high NAV is good for investment Mutual Funds are useful for small investors Mutual Funds are healthy for Indian financial environment Bearish market is good for investment New Fund offers are good than existing fund Mutual fund investments are the substitutes for share investment Mutual Funds give higher return than other investments Mutual funds having diversified portfolio gives better returns Mutual funds with large corpus perform better Growth option is good for long term Mutual Fund investment is an asset for future Public sector mutual funds are safe Dividend payout option is good in tax saving schemes ELSS schemes are good for tax saving ABOUT MUTUAL FUND Factor Loading F1 F2 F3 F Eigen Value Percent of variation explained KMO measure of sampling adequacy:.8144 Extraction Method: Principal component analysis Rotation method: Varimax with Kaiser normalization Bartlett s Test of Sphericity : Chi-square=99.04 Significance Value :.000

10 195 The above table indicates the rotated factor loading for the fourteen variables. It is clear from the table that all the 14 variables have been extracted into 4 factors. The number of variables in each factor, eigen value and the percent of variation explained by the factor is presented in Table 7.5. S. No. Important Aspects TABLE 7.5 IMPORTANT ASPECTS IN MUTUAL FUNDS Number of Variables in Discriminant Coefficient Eigen Value Percent of Variation Explained Cumulative Percent of Variation Explained 1 Investment Return Future Tax savings *Significant at zero percent level. The important factors regarding the perception of investors about mutual funds are investment, return, future and tax savings since their eigen values are , and respectively. Opinion about investment consists of 6 variables with percent of variation explained of per cent. Return consists of 3 variables with the percent of variation explained of percent. Opinion regarding future to the extent of percent. The next factors is opinion about tax savings since its respective eigen values are and the percent of variation explained by the two factor is percent.

11 Level of Perception among Small and Large Investors Investors opinion about mutual fund is again analyzed with the help of t test. Both small and large investors level of opinion is examined. Opinion regarding important aspects in mutual fund is confined to investment, return, and future and tax savings. The result of t test is exhibited in table 7.6. TABLE 7.6 LEVEL OF OPINION ON IMPORTANT ASPECTS IN MUTUAL FUNDS S.No. Important Aspects in Mutual Mean Score among Investors T- Funds Small Large Statistics 1 Investment Return * 3 Future * 4 Tax savings *Significant at five percent level. Source: Primary data. Majority of the small investors are favorable to the perception about tax savings and investments since its means scores are and respectively. Among large investors, these factors are future and return since its mean score of , and respectively. Regarding the level of opinion about important aspects of mutual fund, the significance difference among the small and large investors have been identified in the case of return and future since their respective t statistics are significant at five per cent level Discriminant Factors among Small and Large Investors Small investors and large investors opinion about mutual funds are

12 197 different. In order to identify the important discriminant factors among the two groups of investors, the two group discriminant analyses have been executed. Initially, the mean difference in all factors, its t statistics and Wilks Lambda have been computed to identify the significance and discriminant power of the factors. The results are summarized in Table 7.7. TABLE 7.7 MEAN DIFFERENCE AND DISCRIMINANT POWER OF IMPORTANT ASPECTS OF MUTUAL FUND AMONG SMALL AND LARGE INVESTORS Important Mean Score S. Aspects in among Investors Mean T- Wilks No. Difference Statistics Lambda Mutual Funds Small Large 1 Investment Return * Future * Tax savings *Significant at five percent level. Source: Primary data. The higher mean difference among the two group of investors have been noticed in the case of future and return since their respective mean differences are , and The lesser wilks lambda is noticed in the case of future and return since their respective Wilks Lambda co-efficients are and The significant mean difference is noticed in the case of factors namely return and future.

13 198 The relative contribution of discriminant factors in total discriminant score is computed by the product of discriminant co-efficient and the respective mean difference of the factor. The results are given in Table 7.8. S. No. TABLE 7.8 RELATIVE CONTRIBUTION OF DISCRIMINANT ASPECTS IN Discriminant Aspects TOTAL DISCRIMINANT SCORE Discriminant Coefficient Mean Difference Product Relative contribution in TDS 1 Return Future Total Percent of cases correctly classified: The higher discriminant co-efficient is identified in the case future since their respective discriminant co-efficient are It infers that the above factors are major in the discriminant function compared to other factors. The higher relative contribution to the total discriminant score is identified in the case of future since their respective relative contribution is per cent respectively. The estimated discriminant function correctly classifies the cases to the extent of per cent. The analysis reveals that the important discriminant factor among the small and large investors are future Switching / Withdrawal Behaviour among the Investors The investors may switch from one mutual fund to another in same family funds or withdraw or redeem the units. It depends on their mindset, current market condition, performance of the fund, service of mutual funds, mismanagement etc. The switching/ withdrawal behaviour among the investors

14 199 are usually seen in the market since the investors are frequently sell their mutual funds and invest in other funds. Peles (1997) established that there is evidence of investor psychology affecting fund/scheme selection and switching 4. The reasons for switching/withdrawal are drawn from various reviews (Singh and Chander, ; Agarwal, , Subash and Mukesh, ; Bal and Mishra, ; and Baruna and Srinivasan, ). In the present study the included reasons for switching are fourteen. The investors are asked to rate these fourteen reasons at five point scale. The assigned marks on these scales range from 5 to 1 respectively. The means scores of the reasons among the small and large investors have been computed to exhibit the importance of the reasons. Regarding perception on the reasons, the significant difference among the two group of investors have been analysed with the help of t test. The results are given in table Goetzman, W.N., and Peles, N., (1997), Cognitive Dissonance and Mutual Fund Investors, The Journal of Financial Research, Vol.20(2), pp Singh Jaspal and Chander Subash, (2004), An Empirical Analysis of Perceptions of Investors towards Mutual Funds, Finance India, Vol.XVIII (4), December, pp Agarwal, G.D., (1992), Mutual Funds and Investors Interest, Chartered Secretary, Vol.22(1), January 23, pp Chandar Subash and Mahajan Mukesh, (1992), Perception of Investors towards Mutual Funds: An Empirical Investigation, Indian Journal of Commerce, June, pp Bal, R.K., Mishra, B.B., (1990), Role of Mutual Funds in Developing Indian Capital Market, Indian Journal of Commerce, Vol.43(165), pp Baruna, S.K., and Srinivasan, G., (1982), Experiment on Individual Investment Decision Making Process, Working Paper No.423 (April-June), Indian Institute of Management, Ahmedabad.

15 200 TABLE 7.9 REASONS FOR SWITCHING /WITHDRAWAL OF MUTUAL FUNDS S. No. Reasons Mean Score among Investors Small Large T-Statistics 1. Performance * 2. Involvement of Companies * 3. Portfolio * 4. Return Fund managers efficiency * 6. NAV * 7. Dividend Payment ratio * 8. Future scope of the fund * 9. Capital appreciation * 10. Consistency in performance 11. Adequate unit holders information 12. As per the advice of Friends/Broker 13. Performance of Peer groups 14. Lack of investors Redressal mechanism *Significant at five percent level. Source: Primary data * * * * * The important reasons for switching/withdrawal among the small and large investors are performance, return and NAV since their respective mean score of , and whereas in the large investors case these reasons are lack of investor redressal mechanism, fund managers efficiency and future scope of fund since their respective mean score are , and

16 Regarding the perception on the reasons for switching/withdrawal the significant difference among the two group of investors have been identified in the case of performance, involvement of companies, portfolio, fund managers efficiency, NAV, dividend payment ratio, future scope of the fund, capital appreciation, consistency in performance, adequate unit holders information, as per the advice of friends/broker, performance of peer groups and lack of investors redressal mechanism since their respective t statistics are significant at five per cent level Reasons for Switching/Withdrawal The important reasons for switching/withdrawal are analysed with the help of factor analysis. The score on various reasons for switching have been included for the study. The KMO measure of sampling adequacy and bartletts test of sphericity have been conducted to test the validity of data for factor analysis. Both these two test satisfy the conditions for validity of data since their KMO measure is greater than 0.5 and the chi-square is significant at five percent level. The factor analysis result in three important factors (reasons). The details of the findings of factor analysis is summarized in Table 7.10.

17 202 TABLE 7.10 ROTATED COMPONENT MATRIX FOR IMPORTANT REASONS FOR SWITCHING/WITHDRAWAL OF MUTUAL FUNDS S. No. Variables Factor Loading F1 F2 F3 1 Return NAV Consistency in Performance Performance Dividend Payout Ratio Performance of Peer Groups Involvement of companies Lack of Investors Redressal Mechanism Fund Manger Efficiency Adequate unit holders information Capital Appreciation Portfolio Future Scope of the fund Eigen Value Percent of variation explained KMO measure of sampling adequacy:.7664 Extraction Method: Principal component analysis Rotation method: Varimax with Kaiser normalization Bartlett s Test of Sphericity :Chi-square= Significance Value :.000 The above table indicates the rotated factor loading for the 13 variable. It is clear from the table that all the 13 variables have been extracted into 3 factors.

18 203 S. No. Important Reasons TABLE 7.11 IMPORTANT REASONS FOR SWITCHING Number of Variables Rehabilits Coefficient Eigen Value Percent of Variation Explained Cumulative Percent of Variation Explained 1 Lack of Performance Lack of redressal mechasnism 3 Lack of Appreciation *Significant at zero percent level. The most important factor is lack of performance since its eigen value is The lack of performance factor explain the variables considered for identify mutual fund problems to the extent of per cent. It is followed by the factors namely lack of redressal mechanism since its eigen value is The variance explained by the above factor is The last factor narrated by the factor analysis is lack of appreciation since its eigen value is The variance explained by the factor is per cent Switching/withdrawal Behaviour among Small and Large Investors The important reasons for switching/withdrawal are lack of performance, lack of involvement and lack of appreciation. The score of the factors regarding important reasons for switching/withdrawal are drawn from the mean score of the variables regarding the important problems mutual funds. Regarding the importance given on factors, the significant difference among the small and large investors have been analysed with the help of t test. The results are given in Table 7.12.

19 204 TABLE 7.12 INVESTORS VIEW ON IMPORTANT REASONS FOR S. No. Reasons SWITCHING/WITHDRAWAL Mean Score among Investors Small Large T-Statistics 1. Lack of Performance * 2. Lack of Involvement * 3. Lack of Appreciation * *Significant at five percent level. Source: Primary data. The important factors regarding the investors view on reason for switching/withdrawal among small investor is lack of performance since their respective mean score is Among large investors, the factor is lack of involvement since their respective mean score is Regarding the importance given on these factors, the significant difference among the two group of investors have been identified in the case of lack of performance, lack of involvement and lack of appreciation since their respective t statistics are significant at five percent level Discriminant Factors among Small and Large Investors The reasons for switching/withdrawal of small investors and large investors are different. In order to identify the important discriminant factors among the two groups of investors, the two group discriminant analyses have been executed. Initially, the mean difference in all factors, its t statistics and Wilks Lambda have been computed to identify the significance and discriminant power of the factors. The results are summarized in Table 7.13.

20 205 TABLE 7.13 MEAN DIFFERENCE AND DISCRIMINANT POWER OF IMPORTANT S. No. Important Reasons REASONS FOR SWITCHING Mean Score among Investors Small Large Mean Difference T- Statistics Wilks Lambda 1 Lack of * Performance 2 Lack of * Involvement 3 Lack of Appreciation * *Significant at five percent level. Source: Primary data. The higher mean difference among the two group of investors have been noticed in the case of lack of appreciation and, lack of involvement since their respective mean differences are and The higher discriminant power is identified in the case of lack involvement since their respective Wilks Lambda co-efficient is The significant mean difference is noticed in the case of factors namely lack of performance, lack of involvement and lack of appreciation. The relative contribution of discriminant factors in total discriminant score is computed by the product of discriminant co-efficient and the respective mean difference of the factor. The results are given in Table 7.14.

21 206 TABLE 7.14 RELATIVE CONTRIBUTION OF IMPORTANT REASONS IN TOTAL S. No. 1 2 Important Reasons Lack of Involvement Lack of Appreciation DISCRIMINANT SCORE (TDS) Discriminant Coefficient Mean Difference Product Relative Contribution in TDS Total Percent of cases correctly classified: The higher discriminant co-efficient is identified in the case lack of appreciation since their respective discriminant co-efficient is It infers that the above factors are major in the discriminant function compared to other factors. The higher relative contribution to the total discriminant score is identified in the case of lack of appreciation since their respective relative contribution is per cent. The estimated discriminant function correctly classifies the cases to the extent of per cent. The analysis reveals that the important discriminant factors among the small and large investors is lack of appreciation Conclusion Mutual funds investment is one of the best avenue for investment. The role of mutual fund investors are very important. The investors knowledge level, awareness, opinion regarding mutual fund investment plays vital role in the industry. In Kerala, most of the investors are educated and their knowledge

22 207 and awareness level is good. The investors have good knowledge about the type of funds, fund s investment objective, portfolio of the fund, portfolio manager, net asset value and lock in period. Investors are highly aware of the term, New Fund Offer (NFO), Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), Asset Management Company, AMFI, Exchange Traded Fund, Key Documents, Systematic Transfer Plan (STP), SEBI, and ELSS. The important factors extent the opinion of investors about mutual funds is investment, return, future and tax savings. Regarding the reasons for switching/withdrawal the most important factor is poor performance.