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A STUDY OF MUTUAL FUND SELECTION

BEHAVIOR

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 ACTUAL PROBLEMS OF ECONOMICS 235

Nazim Hussain1, Salman Ali Qureshi2, Abrar Ahmad3

A STUDY OF MUTUAL FUND SELECTION BEHAVIOR
Investor behavior has become an emerging issue in behavioral finance. This paper attempts
to study the behavior of mutual fund investors. It aims at investigating preferences for selecting a
particular mutual fund, and identifying the important areas of mutual funds that appeal to
investors while making investment decisions. Individual investors of listed mutual fund companies
at Karachi Stock Exchange (KSE) were the target population. The response of subjects was col

lected through a structured questionnaire. Independent sample t
test and analysis of variance
(ANOVA) were used for data analysis. Individual investor selection behavior is significantly differ

ent on the basis of demographics.
Keywords: mutual fund; investment decision; selection behavior; fund attributes.

Introduction. Mutual fund industry of Pakistan is in great depression. A decrease

of 40% in total asset size happened between FY08 to FY09. The asset size decreased
from the level of Rs. 337 bln. to Rs. 204 bln. (Rizvi, 2009). Currently the size of local
mutual fund industry at the end of July 2010 is Rs. 212 bln. The growth is only 6.4%
which is minimal as compared to last 5 years growth of 53%. In the third quarter of
current financial year the industry growth again decreased by 5% (Dawn News,
2010).
The history of mutual fund industry of Pakistan started in 1962 with public offer

ing of National Investment Trust (NIT), an open end mutual fund. Later on
Investment Corporation of Pakistan (ICP) came into existence in the early 1966. ICP
offered a number of close end mutual funds. 26 close end mutual funds were offered
by ICP till 1990. In June 2000, government of Pakistan decided to restructure the cor

poration. Privatization of ICP started in 2002. The privatization reforms ignite com

petition in mutual fund industry. Mutual fund sector became a very good investment
option for investors (Shah and Hijazi, 2005). Mutual fund industry is below market
portfolio performance in Pakistan (Nafees et al., 2011).
Mutual fund and bond markets are favorable options of investment in developed
economies. An investor can make better return of investment by entering into mutu

al fund industry. This return is accompanied with security of investment and expert
advice. Mutual fund is an untapped industry in Pakistan. Growth of this industry is
slow in Pakistani economy. Mutual funds are managing only 4.4% of the total bank
deposits and only 10.7% of the total market capitalization. The growth of mutual
funds depends upon the amount of investments available in the economy. The saving
to GDP ratio in Pakistan is very low, this low ratio is causing low available investment.
Analysts have predicted more decline in saving rate because of increased inflation and
low rate of return on bank deposits and government securities. To maximize return on
investment, people should know about the available investment alternatives which
can yield high and safer returns. Although, equity investment offers higher rate of
return but due to lack of awareness of available opportunities investors fail to get max

imum returns (Dawn News, 2009).

1
MS Scholar, Iqra University, Islamabad, Pakistan.
2
corresponding author, MS Scholar, Iqra University, Islamabad, Pakistan.
3
Associate Professor, Iqra University, Islamabad, Pakistan.

© Nazim Hussain, Salman Ali Qureshi, Abrar Ahmad, 2012

236 ACTUAL PROBLEMS OF ECONOMICS

The empirical studies proved that the growth of every business depends upon
customer base. Growth and prosperity of mutual funds depend upon the perception
and behavior of investors. There is a need to understand investors' behavior and pref

erences in selecting a mutual fund. Understanding the behavior of a mutual fund
investor is of great importance, for the firms operating in this industry (Barber,
Terrance Odean, Lu Zheng, 2000). The mutual fund industry of Pakistan is not grow

ing as much as in other developing economies (Daily Dawn, 2009).
The present study aims at investigating the mutual fund industry of Pakistan, this
industry started in 1962 but gained importance after privatization in 2000. The study
is significant for the companies operating in mutual fund industry. The areas identi

fied in the study will help mutual funds to understand their weaknesses as compared
to their competitors and in attracting & retaining investors by focusing on demands.
Furthermore, it is beneficial for new investors to recognize the essential features in
investment decision
making.
Prior research. Investment decision is based on the return and the risk associat

ed with the investment. Every investor expects higher gain on investment with low
risk. Mutual funds are the best option for investors to get return with low risk. The
objective of studying related literature is to identify different factors which an indi

vidual investor keeps in mind while making a choice of mutual fund with relation to
the demography of investors. Investment in a mutual fund seems quite a simple deci

sion but there are a number of important behavioral aspects which influence the
process of selecting a particular mutual fund. Prospect theory explains that investors
get distressed by forthcoming losses and get happy by equal gains.
Research studies have examined that the size of a fund is also significant in
attracting investors. Large mutual funds are able to develop better marketing strate

gies and employ more research staff, which provides more organized and updated
information for portfolio selection (Shukla and Van Inwegen, 1995). Some studies
revealed an inverse relationship between fund size and performance. The basic cause
of this performance deterioration is the pressure of the investment and portfolio
selection style becomes aggressive and frequently changes to gain more profits
(Golec, 1996; Ang et al., 1998; Grinblatt and Titman, 1989).
Another important factor which has gained the importance for investors select

ing a mutual fund is the cost of transaction associated with buying and selling done by
a fund manager (Ramasamy et al., 2003). Studies have found inverse relationship
between expense ratio and performance of mutual fund. Performance is measured by
the return derived by an investor. This return decreases as the expense ratio increases.
The increase in expense ratio is caused by the active trading strategy of a fund man

ager. For active trading a fund manager has to deploy a large research team. Investors
tend to select a fund in which transactions are less in number and resultantly having
low expense ratio (Liljeblom and Loflund, 2000). Mutual funds with low expense
ratio are more advantageous for investors than the funds with high ratio (Ippolito,
1989; Elton, Gruber and Blake, 1996 and Golec, 1996).
The characteristics of a fund manager are also considered by the investors while
selecting a particular mutual fund because a manager of a fund decides: how much to
invest? When to invest? Where to invest? Some characteristics are of great concern for
investors like experience, qualification, and investment style of fund manager. Shukla

ACTUAL PROBLEMS OF ECONOMICS Vol. 2, #4, 2012

 ACTUAL PROBLEMS OF ECONOMICS 237

and Inwegen (1995) analyzed performance of local and foreign mutual fund man

agers and found that local fund managers outperformed. The reasons behind their
better performance are: proper knowledge and information about taxes, legal and
institutional constrains, portfolio selection and street information. Therefore, local
fund managers have more access to a market and information, which help them in
making the right investment decision (Ang, Chen and Lin, 1998).
Golec (1996) explained that performance of a particular fund associates with
experience of a fund manager. It is also found that the age of a manager is not a sig

nificant factor which can influence performance. Good analytical skills acquired by
a manager with experience and having valuable market information are two traits of
a manager which yield better returns (Ang et al., 1998). Management style of man

agers does matter for performance as well as for investors' choice. If a fund manager
is persistent in his investment strategy then positive performance results are achiev

able. Qualification of a fund manager has not any significant importance in affecting
fund performance (Indro, Jiang and Hu, 1998).
Method. Mutual funds have both institutional and individual investors. The tar

get population of the study is individual mutual fund investors in Pakistan. The
researchers used a non
probability, purposive sampling technique. The sample was
selected after getting investors' data from 23 mutual fund companies. The sample data
was purposively collected from the investors having investment more than PAK Rs.
2,00,000. The data is collected through a pretested questionnaire from the subjects.
The questionnaire was adapted from the research on Malaysian capital market by
Ramasamy and Matthew (2003). They studied the investor preferences at Malaysian
mutual fund market. They administered their survey on financial advisors. The
aspects in demography of the respondents are given in Table 1.
Table 1. Demographics of Respondents
Gender % age Marital status % age
Male 79 Married 76
Female 21 Unmarried 6
Age Widow 12
30–40 6 Divorced 6
41–50 23 Occupation
51–60 60 Business 56
61 and above 11 Salaried 15
Education Retired 12
Undergraduate 6 *Others 17
Graduate 17 Annual Income
Postgraduate 74 > 500,000 15
MS/PhD 3 5,00,001–7,50,000 17
7,50,001–1,000,000 23
< 1,000,001 45
* others are household savings.

In the first part the respondents were asked about their demographic informa

tion. In the second part the respondents were asked to select their preferred charac

teristic of a mutual fund which they want in their fund. These choices are given below
in Table 2. Total 1530 questionnaires were distributed among population of the study
and the response was 22%. Total number of the useable responses was 337.

ACTUAL PROBLEMS OF ECONOMICS Vol. 2, #4, 2012

238 ACTUAL PROBLEMS OF ECONOMICS

Table 2. Characteristics of Mutual funds

Above Normal 3 years
Performance Impressive growth last year
Consistent over last 5 years
Postgraduate
Qualification of Fund Manager
Professional qualification
Less Than 7 yrs
Experience of Fund Manager
More Than 7 yrs
Conservative
Investment Style
Aggressive
Stock fund
Income fund
Fund Type Pension fund
Islamic fund
Hybrid fund
Government
Affiliation of Mutual Fund Financial Institutions
Specialized in one Fund
Number of Funds Managed
Diversified

The respondents were asked to choose only one item against each mentioned
characteristic of a mutual fund and from first to last the researchers aimed at finding
investor preferences in every area. Independent sample t
test and analysis of variance
(ANOVA) were applied on the collected responses. For t
test the hypotheses of the
study are as follows:
H1: There is a significant difference between male and female investors in selecting
mutual fund upon the basis of past performance of mutual fund.
H2: There is a significant difference between male and female investors in selecting
mutual fund upon the basis of experience of fund manager.
H3: There is a significant difference between male and female investors in selecting
mutual fund upon the basis investment style of fund manager
H4: There is a significant difference between male and female investors in selecting
mutual fund upon the basis fund type.
H5: There is a significant difference between male and female investors in selecting
mutual fund upon the basis of affiliation of mutual fund.
H6: There is a significant difference between male and female investors in selecting
mutual fund upon the basis of number of funds managed.
Table 3. Mutual Fund Selection Behavior between Male and Female Investors
(Independent Sample t
test, N = 337)
Variables Gender Mean P-value Hypotheses
Performance Male 2.7164 0.032 Accepted
Female 1.5797
Experience of Fund Manager Male 2.0000 0.000 Accepted
Female 1.2899
Investment Style of Fund Manager Male 1.8291 0.000 Accepted
Female 1.0000
Fund Type Male 1.5582 0.040 Accepted
Female 2.2754
Affiliation of Mutual Fund Male 1.7836 0.005 Accepted
Female 2.8551
Number of Funds Managed Male 1.7836 0.005 Accepted
Female 1.0551

ACTUAL PROBLEMS OF ECONOMICS Vol. 2, #4, 2012

 ACTUAL PROBLEMS OF ECONOMICS 239

The results of the independent sample t
test show that all the hypotheses are
accepted and gender has created a difference in choosing a mutual fund for invest

ment. All the calculated P
values are less than P < 0.05 showing a significant differ

ence. Upon the basis of calculated P
value all assumed hypotheses are accepted.
The results of ANOVA show there is a significant difference (P = .0000 and F

Statistics = 11.292) within a group in selecting a mutual fund upon the basis of their
age differences. Age groups 30–40 and 61 and above have same response for past per

formance having mean value 3.0000. Other two groups have means 2.1718 and 2.2250
respectively. This shows a preference for consistent growth over the last 5 years. All the
age groups of respondents preferred more than 7 years experience of fund manager
except second age group (mean = 1.2154). Young investors prefer aggressive style,
stock fund and affiliation with financial institutions for their funds.
Other demographic aspects are qualification of an investor, marital status, occu

pation, and income level. Postgraduate investors like impressive growth last year with
mean 2.1200. They are the investors who like aggressive investment style with mean
2.0000 and stock fund with mean 1.2680. Their presence is for diversified fund hav

ing mean value (1.8550). Unmarried investors prefer impressive growth last year with
mean 2.0000 and aggressive investment style along with preference for stock fund.
The results show that widows like to choose less risky investment option. Retired peo

ple are also afraid of taking risk and like consistency of the fund performance. They
are conservative in investment style and prefer to invest in fund affiliated with gov

ernment with mean value (3.0000, 1.0000, and 1.0000 respectively). Average income
level groups i.e., 500,000–750,000, 750,001–10,00,000 are more risk
taking. They
have aggressive investment style and like to invest in stock funds.
Discussion. Present study has investigated the effects of demography of the
investors on the selection of mutual funds for their investment decisions. The results
have shown there is a significant difference in different demographic aspects on
choice of investors. The first hypothesis of the study is based upon the dichotomy of
the respondents; the males and females have different choice about the funds upon
the basis of performance and fear of investment loss (Danial and Amos, 1979). There
is a significant difference of choice of mutual fund among male and female investors
with significant P
values less than .05. The investors make their investment decision
upon the basis of their knowledge about the attributes of their investment options
(Shukla and Inwegen, 1995).
The analysis of variances (ANOVA) indicates that several factors are important
for an investor while selecting a mutual fund. ANOVA results show that demography
of investors significantly affects selection behavior. They consider some attributes of
mutual funds more important than others. The results depict that mutual funds must
have consistent growth for past 5 years. This consistent growth will help funds to
attract a large pool of investors (Ramasamy and Matthew, 2003). Young investors are
found more risk taking than the investors in other age groups and they prefer to select
stock funds for their investment having mean value of 1.000. It has also been observed
that the age group of 41–50 requires regular cash inflows, therefore they choose
income fund for their investments (mean = 2.359). The old age investors are risk
averse. They select conservative investment style and pension funds for them (mean
= 2.5128). There is a significant impact of education of investors on their selection

ACTUAL PROBLEMS OF ECONOMICS Vol. 2, #4, 2012

240 ACTUAL PROBLEMS OF ECONOMICS

behavior. Less educated investors select stock fund while more educated gave mixed
response for given categories of mutual funds. Unmarried investors are more aggres

sive. They tend to invest in funds whose managers' investment style is aggressive
(mean = 1.000). Widows investor are risk averse therefore they select pension funds
with mean = 2.487. Only retired investors like to invest in pension funds. Pension
funds should focus on this segment of the market.
Practical implications & future research. The study aims at investigating the
investor selection behavior towards a mutual fund. This study is helpful to companies
operating in mutual fund industry of Pakistan. The results of the study will help fund
managers in attracting and retaining investors. Mutual fund managers may also offer
new services and funds to attract/retain investors. Furthermore, managers can suggest
investors to invest in different types of funds based on demographics. Individual
investors can inspect the characteristics of funds before selection an investment.
Future researchers can take some other categories of investors for analyzing their
preferences in selecting mutual funds. Secondly, further research can add more char

acteristics of mutual funds like fund size, transaction cost and corporate social
responsibility of mutual funds. Along with this, future research can produce better
results by increasing the sample size.
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