MUTUAL FUND: BEHAVIORAL FINANCE S PERSPECTIVE

34 ABSTRACT MUTUAL FUND: BEHAVIORAL FINANCE S PERSPECTIVE MS. AVANI SHAH*; DR. NARAYAN BASER** *Faculty, Shree Chimanbhai Patel Institute of Management and Research, Ahmedabad. **Associate Professor, Shri Jairambhai Patel Institute of Management and Computer Application, Ghandhinagar. This paper aims to study the investor s preference in selection of Mutual fund and measuring the fund sponsor quality. A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. Being a part of financial markets although mutual funds industry is responding very fast by analyze investor s perception and expectations. In this paper, research of 305 mutual fund investors was conducted in Ahmedabad using non-probability convenience sampling. After using One-Way ANNOVA, researcher had come to a conclusion that Funds reputation, Withdrawal facilities, brand name, Sponsor s past performance in terms of risk & return varies among the investor s of different age group & investor s different occupation group. KEYWORDS: Behaviour Finance, Investment Decisions, Fund Performance, Sponsor Quality. INTRODUCTION This Mutual fund industry is playing an important role to provide an alternative avenue to the entire gamut of investors in a scientific and professional manner. Mutual funds have played a significant role in financial intermediation, the development of capital markets and the growth of the Indian Economy. The Indian mutual fund industry has been no exception. Though it is relatively new, it has grown at a dynamic speed, influencing various sectors of the financial market and the national economy. The Indian economy is under transition on account of the ongoing structural adjustment programs and liberalization. The money market mutual fund segment has a total corpus of $1.48 trillion in the U.S. against a corpus of $100 million in India. The ownership of the fund is thus joint or "mutual"; the fund belongs to all investors. He or her bears in the same proportion as the amount of the contribution make a single investor's ownership of the fund to the total amount of the fund. LITERATURE REVIEW Brown & Goetzmann(1997) emphasis on mutual fund styles. Mutual funds are typically grouped by their investment objectives or the style of their managers. This approach is simple to apply, yet it captures nonlinear patterns of returns that result from virtually all active portfolio

35 management styles. Classifications are superior to common industry classifications in predicting cross-sectional future performance, as well as past performance, and also outperform classifications based on risk measures and analogue portfolios. Interestingly, growth funds typically break down into several categories that differ in composition and strategy. Syriopoulos (2002) gave its review on an analysis of investor s risk perception towards mutual funds services. Financial markets are constantly becoming more efficient by providing more promising solutions to the investors. Being a part of financial markets although mutual funds industry is responding very fast by analyze investor s perception and expectations. Spiegel (2004) covers analyzed the security returns follow linear factor model with constant coefficients. This paper develops and estimates a Kalman filter statistical model to track time-varying fund alphas and betas. Several tests indicate that relative to a rolling OLS model the Kalman filter model produces more accurate fund factor loadings both in and out of sample. Bergstresser (2007) stipulates that many investors purchase mutual funds through intermediated channels, paying brokers or financial advisors for fund selection and advice. Brokers sold funds exhibit no more skill at aggregate-level asset allocation than do funds sold through the direct channel. Our results are consistent either with substantial non-tangible benefits delivered by the brokerdistributed sector or with conflicts of interest between brokers and their clients. Fama (2009) emphasis on the skills required for cross section of mutual funds returns. they focuses on the aaggregate portfolio of U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark adjusted expected returns sufficient to cover their costs. Ivković and weisbenner (2009) studied on Individual investor mutual fund flows. They studied the relation between individuals mutual fund flows and funds characteristics, establishing three key results. First, consistent with tax motivations, individual investors are reluctant to sell mutual funds that have appreciated in value and are willing to sell losing funds. Second, individuals pay attention to investment costs as redemption decisions are sensitive to both expense ratios and loads. Marco.et.al (2011) analysed the risk-taking behavior of a fund manager in response to prior performance by conducting a comparative analysis between ethical and conventional investment portfolios. The paper examined the influence on managerial risk taking of the compensation and employment incentives. Cederburg (2008) reviewed on the mutual fund investor behavior across the business cycle. Mutual fund investor behavior changes across the business cycle. In economic expansions, investors strongly display the documented behaviors of chasing returns and searching for managerial skill. In contrast, recession investors do not chase returns and exhibit a weaker tendency to seek alpha. Even before controlling for momentum, no smart money effect exists in recessions. Zhao (2004) reviewed fund families typically claim that closing a fund protects the fund superior performance by preventing it from growing too large to be managed efficiently. Even though funds with better performance and larger size are more likely to be closed, there is no evidence that closing a fund can indeed protect its performance. Instead, fund closing decisions are more likely to be motivated by spillover effects by closing a star fund, the fund family signals its superior performance and also bring investors attention and investments to other funds in the family. Some evidence exists to suggest that the closing strategy is effective in generating higher inflows into the rest of the family, at least in the short run.

36 RESEARCH METHODOLOGY RESEARCH OBJECTIVE The objective of this research paper is to examine and analyse investor s preferences for fund performance and fund sponsor qualities of mutual funds in Ahmedabad city. HYPOTHESIS H1: There is no significance difference between respondents of different age group and their preference for fund related questions. H2: There is no significance difference between respondents of different age group and their preference for fund sponsor qualities. H3: There is no significance difference between respondent having different occupation and their preference for fund related questions. H4: There is no significance difference between respondent having different occupation and their preference for fund sponsor qualities. RESEARCH DESIGN Aim of this paper is to study investor s behaviour pertaining to the mutual fund & to fulfil the objective, various past literatures were reviewed & hence suitable research design is Descriptive Research. The research is being carried with the use of primary data in which structured questionnaire is used as a tool for data collection. The questionnaire has been personally administered on the sample size of 305, chosen on a convenient basis from Ahmedabad city. Questionnaire was prepared keeping in mind the various outcomes possible. It was taken care to minimize the possibility of wrong interpretation and biased views. The five-point likert scale was used to analyze the different variables and their relationship. For the analysis of data statistical methods are applied with the aid of SPSS (Statistical Package for Social Science) software, version 19.0 and excel. DATA ANALYSIS For the data analysis, research has applied one-way ANOVA. Researcher had tried to find out the factors affecting an investor s preferences for fund performance and sponsor quality taking the demographic variables like age and occupation into the consideration. ONE-WAY ANOVA 1. Age and preference for fund related questions and fund sponsor qualities

37 ANOVA: Fund Related Questions Sum of Squares Df Mean Square F Sig. H 0 Fund performance record Between Groups 5.359 3 1.786 1.517 0.210 Do not Within Groups 366.228 311 1.178 Total 371.587 314 Between Groups 8.586 3 2.862 2.731 *0.044 Funds reputation Within Groups 325.878 311 1.048 and brand name Scheme s expense ratio Reputation of the Fund Manager/Schemes Total 334.463 314 Between Groups.699 3 0.233 0.201 0.896 Do not Within Groups 360.273 311 1.158 Total 360.971 314 Between Groups 3.473 3 1.158 1.557 0.200 Do not Within Groups 231.276 311 0.744 Total 234.749 314 Scheme s portfolio of investment Between Groups 2.520 3 0.840 0.835 0.476 Do not Within Groups 313.067 311 1.007 Total 315.587 314 Withdrawal facilities Between Groups 6.439 3 2.146 2.087 0.102 Do not Within Groups 319.815 311 1.028 Total 326.254 314

38 Between Groups 0.976 3 0.325 0.262 0.853 Do not Favourable rating by a rating agency Within Groups 386.439 311 1.243 Total 387.416 314 Innovativeness the scheme Between Groups 1.840 3 0.613 0.509 0.676 Do not of Within Groups 374.604 311 1.205 Total 376.444 314 Entry and exit load Between Groups 3.514 3 1.171 1.144 0.331 Do not Within Groups 318.486 311 1.024 Total 322.000 314 Minimum investment Between Groups 14.896 3 4.965 4.027 *0.008 initial Within Groups 383.453 311 1.233 Total 398.349 314 Note: Grouping variable Age. * Significant at 5% significance level. ANALYSIS The result of the test shows that age does not have any impact on investor s preference for Fund performance record, Scheme expense ratio, Reputation of fund manager, Scheme portfolio, Withdrawal facilities, Favorable rating by rating agency, Innovativeness and Entry & exit load. However, age is an important variable that affect investor s preference for Funds reputation and brand name and minimum initial investment.

39 2. RESPONDENTS AGE AND FUND SPONSOR QUALITIES ANOVA: Fund Sponsor Qualities Sum of Squares Df Mean Square F Sig. H 0 Reputation of sponsoring firm Between Groups 0.645 3 0.215 0.168 0.918 Do not Within Groups 398.009 311 1.280 Total 398.654 314 Sponsor has a recognized brand name Sponsor has a welldeveloped agency and network Sponsor s expertise in managing money Between Groups 4.513 3 1.504 0.961 0.412 Do not Within Groups 486.998 311 1.566 Total 491.511 314 Between Groups 2.768 3 0.923 0.765 0.515 Do not Within Groups 375.219 311 1.206 Total 377.987 314 Between Groups 11.003 3 3.668 2.576 0.054 Do not Within Groups 442.851 311 1.424 Total 453.854 314 Sponsor has a welldeveloped research and infrastructure Sponsor s past performance in terms Between Groups 6.517 3 2.172 1.886 0.132 Do not Within Groups 358.232 311 1.152 Total 364.749 314 Between Groups 6.755 3 2.252 1.627 0.183 Do not

40 of risk and return Within Groups 430.375 311 1.384 Total 437.130 314 Note: Grouping variable Age. * Significant at 5% significance level. ANALYSIS The result of the test reveals the fact that investors of different age groups do not have any strong preference for Reputation of sponsoring firm, Sponsor has a recognized brand name, Sponsor has a well-developed agency and network, Sponsor s expertise in managing money, Sponsor has well-developed research and infrastructure and Sponsor s past performance in terms of risk & return. 3. RESPONDENTS OCCUPATION AND PREFERENCE FOR FUND RELATED QUESTIONS AND SPONSOR QUALITIES. Fund record ANOVA Fund Related Questions Sum of Squares Df Mean Square F Sig. H 0 Between Groups 2.156 3 0.719 0.607 0.611 Do not performance Within Groups 368.244 311 1.184 Funds reputation and brand name Scheme s ratio Reputation of the Fund Manager/Schemes Total 370.400 314 Between Groups 17.152 3 5.717 5.570 *0.001 Within Groups 319.248 311 1.027 Total 336.400 314 Between Groups 3.440 3 1.147 0.997 0.394 Do not expense Within Groups 357.532 311 1.150 Total 360.971 314 Between Groups 5.391 3 1.797 2.391 0.069 Do not Within Groups 233.752 311 0.752

41 Scheme s portfolio of investment Withdrawal facilities Favourable rating by a rating agency Innovativeness of the scheme Entry and exit load Minimum investment Total 239.143 314 Between Groups 5.802 3 1.934 1.922 0.126 Do not Within Groups 312.852 311 1.006 Total 318.654 314 Between Groups 11.243 3 3.748 3.722 *0.012 Within Groups 313.157 311 1.007 Total 324.400 314 Between Groups 3.660 3 1.220 0.996 0.395 Do not Within Groups 381.051 311 1.225 Total 384.711 314 Between Groups 4.714 3 1.571 1.323 0.267 Do not Within Groups 369.457 311 1.188 Total 374.171 314 Between Groups 5.916 3 1.972 1.922 0.126 Do not Within Groups 319.081 311 1.026 Total 324.997 314 Between Groups 6.925 3 2.308 1.840 0.140 Do not initial Within Groups 390.206 311 1.255 Total 397.130 314 Reputation sponsoring firm Fund Sponsor Qualities Between Groups 2.104 3 0.701 0.558 0.643 Do not of Within Groups 391.178 311 1.258 Total 393.283 314 Sponsor has a recognized brand name Between Groups 33.610 3 11.203 7.689 *0.000 Within Groups 453.133 311 1.457

42 Sponsor has a welldeveloped agency and network Total 486.743 314 Between Groups 3.015 3 1.005 0.843 0.471 Do not Within Groups 370.972 311 1.193 Total 373.987 314 Sponsor s expertise in managing money Between Groups 15.471 3 5.157 3.642 *0.013 Within Groups 440.383 311 1.416 Total 455.854 314 Between Groups 5.512 3 1.837 1.582 0.194 Do not Sponsor has a welldeveloped research Within Groups and infrastructure 361.218 311 1.161 Total 366.730 314 Between Groups 18.198 3 6.066 4.511 *0.004 Sponsor s past performance in terms Within Groups 418.202 311 1.345 of risk and return Total 436.400 314 Note: Grouping variable Occupation. * Significant at 5% significance level. ANALYSIS OCCUPATION AND PREFERENCE FOR FUND RELATED QUESTIONS The result of the ANNOVA stipulates that occupation does not play an important role in investor s preference for Fund performance record, Scheme expense ratio, Reputation of fund manager, Scheme portfolio, favorable rating by rating agency, Innovativeness of the scheme, Entry & exit load and minimum initial investment. However, Funds reputation, Withdrawal facilities, and brand name gets vary among the investors having different occupation. OCCUPATION AND FUND SPONSOR QUALITIES The result of the test show that investors of different occupation groups do not have any preference for Reputation of sponsoring firm as Sponsor has a well-developed agency & network and Sponsor has well-developed research and infrastructure. However, differences were found to be significant for Sponsor has a recognized brand name, Sponsor s expertise in managing money and Sponsor s past performance in terms of risk & return in term of sponsor qualities.

43 CONCLUSION AND SCOPE FOR THE FUTURE RESEARCH Indian Mutual fund industry is gradually moving towards growing phase. Over the last few years level of awareness has increased. But level of awareness has not yet reached to mass investors. Two demographic variables: Age & Occupation have taken for the study & researchers have tried to study the impact of the two variables on investor s preference towards funds reputation & brand name and minimum initial investment. Study has concluded that occupation is a variable that affects investors preference for Fund Sponsor qualities, brand name, Sponsor s expertise in managing money and Sponsor s past performance in terms of risk & return where as age does not play any role in building the investor s preference for Fund Sponsor qualities Mutual fund is a very popular concept among the investor s but it requires more awareness to be spread among the target audience. One major limitation of the study is that sample does not represent the whole population as research is restricted to Ahmedabad city only. Respondent bias is another limitation of the study. It can be concluded in nut shell that the future of mutual fund industry is very bright and many aspects of behavior finance in mutual fund have not been covered in the current research that can be studied in the future. REFERENCES www.amfi.com www.moneycontrol.com http://business-standard.com/india/news/qa-sandesh-kirkire-kotak-mutual-fund/459181/ http://economictimes.indiatimes.com/mutual_funds Brown & goetzmann (1997) Mutual fund styles. Journal of Financial Economics, Volume 43, Issue 3, March 1997,Pages 373-399. Bergstresser, Daniel B., Chalmers, John and Tufano, Peter, Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry (October 1, 2007). AFA 2006 Boston Meetings; HBS Finance Working Paper No. 616981. Available at SSRN: http://ssrn.com/abstract=616981 or doi:10.2139/ssrn.616981 Fama, Eugene F. and French, Kenneth R., Luck Versus Skill in the Cross Section of Mutual Fund Returns (December 14, 2009). Tuck School of Business Working Paper No. 2009-56; Chicago Booth School of Business Research Paper; Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1356021 Ivković & weisbenner (2009) studied the research paper on Individual investor mutual fund flows Journal of Financial Economics, Volume 92, Issue 2, May 2009,Pages 223-237.

44 Marco,et.al (2011) Ethical and conventional mutual fund managers show different risktaking behavior? The Spanish Review of Financial Economics, Volume 9, Issue 1,January-June 2011, Pages 11-19. Spiegel, Matthew I., Mamaysky, Harry and Zhang, Hong, Estimating the Dynamics of Mutual Fund Alphas and Betas (October 25, 2004).Yale ICF Working Paper No. 03-03; EFA 2003 Annual Conference Paper No. 803; AFA 2004 San Diego Meetings. Available at SSRN: http://ssrn.com/abstract=389740 Syriopoulos (2002), Risk aversion and portfolio allocation to mutual fund classes. International Review of Economics & Finance, Volume 11, Issue 4,2002, Pages 427-447. Zhao (2004),why are some mutual funds closed to new investors? Journal of Banking & Finance, Volume 28, Issue 8, August 2004, Pages 1867-1887.