AN ANALYSIS OF FINANCIAL BEHAVIOUR OF INVESTORS IN

MUTUAL FUND INVESTMENT

S.N.Selvaraj1, H.Shamina2 and C.Dhanya3

ABSTRACT

Investors’ expectation is a very important factor in the Investment analysis that needs to be
analyzed by all alternative investment avenues. In the past few years, we had seen a dramatic
growth of the Indian Mutual Fund Industry with many private players bringing global
expertise in the investment field. The success of any mutual fund a popular means of
investment depends on how effectively it has been able to meet the investors’ expectation.
The present study focuses on measuring investors’ expectation and their preference. It also
attempts to measure the factors that they take into consideration before making any
investment in mutual fund as well as the awareness level among individual investors
regarding mutual fund investment. The sample survey has been conducted in Namakkal
District during the period November 2010- January 2011. A sample of 100 individual mutual
fund investors has been surveyed through a pre-tested questionnaire. The investors include
people who have invested in mutual funds and have some knowledge about the basic
terminologies involved with mutual fund. An attempt has been made to identify the factors
perceived to be important by the investors before investing in any mutual fund. The
objectives of the study are (1) To examine the savings interest among individual investors,
(2) To examine the fund/scheme preference of investors, (3) To understand the preferential
feature in the savings instrument and (4) To examine mutual fund conceptual awareness
among the present investors. The analysis in respect of objectives has been done and weights
have been assigned to ranks in increasing order to signify high importance and low
importance. Presently, as more funds are entering the industry, strategic marketing and
financial decision of these companies are vital for their survival. Investors have become
more alert and choosy. Hence the success of mutual fund depends on complete
understanding of the psychology of the small investors. The present study is an attempt to
understand financial behaviour of mutual fund investors in connection with scheme
preference and selection which would help the mutual fund industry to ascertain the investor
expectation and changing perception.

Introduction
Mutual Funds came into existence to provide an investment opportunity to such people who
do not want to take much risk. The savings of the investors have to be mobilized for a
productivity use and this is possible only by certain types of investment. The mutual fund is
basically a risk reduction tool is achieved by diversification of the portfolio. It designs, its
schemes to meet the needs of different types of investors in terms of nature of investments,
dividend distribution and liquidity, etc. The superfluity of schemes provides variety of

1
Assistant Professor, Wisdom School of Management, Udumalpet
2
Assistant Professor, Wisdom School of Management, Udumalpet
3
Assistant Professor, Wisdom School of Management, Udumalpet
options to suit the individual objectives whatever their age, financial position, risk tolerance
and return expectations.

Indian Mutual Fund industry provides reasonable options for an ordinary man to invest in the
share market. In the past few years, we had seen a dramatic growth of the Indian MF industry
with many private players bringing global expertise. The Mutual Fund is structured around
the mitigation of risk through the diversification of investments across multiple entities. The
MFs came as a considerable saving instrument to the investors who neither had the expertise
nor the time to conduct a careful analysis before investing their hard-earned money. MFs
provide them professional portfolio management services at a lower cost.

The MF industry has evolved as an important financial intermediary in the

Indian capital market. As on March 2010, the industry comprising 37 (AMFI),
Asset Management Companies (AMCs) managed financial assets of over 4.90 trillion.
Domestic MF industry is growing at a CAGR of 30% during the last three years, according to
the Associated Chambers of Commerce and Industry of India (ASSOCHAM). The entry of
commercial banks and private players in the MF industry coupled with the rapid growth of
the Indian capital markets during the past couple of years has fostered as impressive growth
in the industry.

Overview of Literature
MF investments bring a new era in the history of investment world. On the one hand it
reduces the tax burden of the investors and it gives a considerable amount of return without
having a large amount of risk burden. Due to its multiple advantages as an investment
avenue, it creates interest in researchers and academicians to do research on it. There have
been a less number of studies conducted in India as compared to the developed capital
markets. It is obvious that the studies done both in India and abroad regarding the fund
selection behavior of individual investors.

Investor’s expectation is a very important factor that needs to be analyzed by all investment
alternatives. The success of any MF depends on how effectively it has been able to meet the
investors’ expectation. The study focuses on measuring the investors’ expectation, their
preference and awareness level regarding MF investments. The strategic marketing decisions
of the MF companies would be more effectively framed if they are supported by such a
detailed study of the investors’ preference and expectations. This would further ensure the
success of MFs.

MF as Investment Portfolio
Mutual Funds are wonderful investments for people who have little time or interest in
tracking a portfolio of investments themselves. Other benefits of mutual funds include their
ability to capitalize on economies of scale and reasonably create a widely diversified
portfolio for small investors. An investor who lacks the knowledge to manage their own
investment can turn to the mutual fund and let a professional handle all the securities,
analysis and questions of when to buy or sell for them. This works so well that better than 95
million people invest in mutual funds, making them the largest financial intermediary in the
United States. The investors in mutual funds may be newcomers to investing or they may be
experienced investors.

Mutual fund in which the investor invests is an easy process and it can be done just by
referring the credit union and local library. The thing he wants to determine is his risk
tolerance, how much money he wants and how soon he wants to retire. Young people just
starting out may not have a lot of money to invest in the beginning. This is where mutual
funds can really shines for him. Many mutual funds will allow beginning with under two
thousand and some will even start with as little as 1000 rupees. Investment in a mutual fund
really means investor is a part owner in a pooled diversification, managed by professionals
and able to take advantage of investments through this alliance that he could never afford on
his own. Mutual funds can be bought or sold on any day the market is doing business. The
money can be in investor’s hands in a matter of few days.

Importance of Awareness
Awareness belongs to internal characteristics of their investment decision. It is essential for
the AMCs to know the level of awareness about MF among investing public. This will
enable them to create an external environment that can influence investment decisions of
investors. The study measures the general awareness level among individual investors also to
find out the result. AMCs should take not of this and follow a segmented approach in
marketing the product and in creating awareness. The results of Chi-square test shows the
dependency between awareness level and each demographic factor such as age, income and
gender separately.
Objectives of the Study
The present study has the following general objectives:
 To examine the savings interest among individual investors.
 To examine the fund/scheme preference of investors.
 To understand the preferential feature in the savings instrument.
 To examine mutual fund conceptual awareness among the present investors.

Research Methodology
In the preliminary stage, we gathered a database of MF investors from different brokers and
fixed appointments with them. We have selected 40, 40 and 60 investors in Komarapalayam,
Tiruchengode and Namakkal Towns respectively. Out of 140 investors it was restricted to
100 investors due to some difficulties and had personal interview with them.

Sampling Design
The target respondents include all such individual investors who have invested in MFs and
have some knowledge about the basic terminologies of MFs. However, the sampling has
turned out be a convenient sampling systematically chosen from blocks of the area
conveniently located for the enumerators.

Data Collection
The enumerators visited the investors according to the appointment fixed with them. They
filled up the interviewer administered questionnaire with feedback from the respondents. The
data collection went on for 45 days during November 2010- January 2011.

Analysis
The responses to the different questions have been represented using a pie chart. Ranks have
been provided in the tables in respect of the respondents for the different (1) savings
instrument preference among individual investors; (2) current attitude of investors towards
the fund/scheme preference (3) understanding the preferential features in the savings
instrument among investors. Weights in percentage have been assigned to the ranks to
scrutinize the analysis.

A chi-square test has been done to examine whether there exists any dependency between
awareness level and each demographic factor such as age, income and gender separately.
Data Analysis
Savings Interest among Individual Investors
The savings interest of majority of individual investors is ‘to provide for purchase of assets’
followed by the intention ‘to meet contingencies’ and ‘tax reduction’. Asset Management
Companies (AMCs) can attract investors by designing products that ensure a reasonable
return and ensure safety of the capital. The tax saving instrument would also provide to be
lucrative if marketed effectively.

Figure 1: Savings Interest among Individual Investors

Preference for Savings Instruments

The investment attitude of investors is highlighted by their asset preference pattern. The
study reveals that bank deposits are the most popular savings instrument among investors of
Namakkal District, as they are unique financial products which enable an average salaried
person to get a balanced proportion of reasonable returns, along with safety of capital and
liquidity. (Table:1). The liquidity provided will help investors meet the contingencies, which
is one of their primary objectives of saving. This is followed by Life Insurance which again
ensures safety of the capital along with reasonable returns and also provides Tax Savings.
UTI MF occupies the third position highlighting its growing popularity among retail
investors. The other saving instruments are not so popular due to the lack of awareness
among investors.
Table:1
Savings Instruments Preference % Priority
Currency 7.06 IX
Bank Deposit 14.72 I
Life Insurance 14.26 II
Pension and Provident Fund 11.14 IV
Shares 9.90 V
UTI MF 11.82 III
Postal Savings 9.36 VII
Chits 2.72 X
Real Estate 9.14 VIII
Gold 9.88 VI

Fund/Scheme Preference among Investors

Mutual Funds provide a superfluity of options, ranging from growth schemes to fixed income
schemes. Nowadays, investors are not offered just plain vanilla schemes but assorted
schemes in tune with their personal preferences. According to Table 2, MF scheme
preference for the majority of investors is ‘growth scheme’ followed by ‘income scheme’.
The investors are interested in earning higher return rather than regular safe returns.

Table:2
Schemes of MF Preference % Priority
Growth Fund 23.56 I
Balance Fund 17.48 III
Income Fund 19.40 II
Money Fund 16.20 IV
Tax Fund 12.08 V
Index Fund 11.28 VI

Analysis of scheme preference by nature of operation reveals the popularity of ‘open-ended’

schemes. In India, majority of the schemes are open-ended as investors can buy or sell units
at NAV related prices whenever they wish. The preference for open-ended scheme has also
given due importance to ‘liquidity’ and ‘flexibility’ to enter and exit at wish, which is given
high importance by the investors in selecting an investment avenue. On the other hand, only
few of the respondents (6%) have voted for ‘interval schemes’ which shows lack of
awareness with regard to the scheme benefits.
 Figure 2: Preference for MF Schemes among Investors

Preferential Feature in the Savings Instrument among Individual Investors

The Chairman of UTI, has summarized the psyche of a typical Indian investor in three words
– yield, security and liquidity. Table 3 shows that the investors’ need for safety is foremost,
followed by good return, liquidity, flexibility, tax benefit, capital appreciation, diversification
benefits and professional management.

Table 3: Preference for Different Features of Mutual Funds

Safety 15.86 I
Liquidity 14.76 III
Flexibility 13.66 IV
Good Return 14.86 II
Tax Benefit 12.18 V
Capital Appreciation 10.04 VI
Professional Management 8.70 VIII
Diversification Benefit 9.94 VII

MF Conceptual Awareness Level of Individual Investors

Knowledge about the level of awareness about MFs among the investing public will enable
AMCs to create an external environment that can influence investment decisions of investors.
The study reveals that the general awareness level among individual investors regarding the
concept and functioning of MF is good. Awareness has been measured by collecting the
responses to some basic facts related to MFx. Those respondents who have given more than
50% right answers have been categorized as aware and the rest as unaware.
 Figure 3: Awareness among Mutual Fund Investors

It was found that 72% of the respondents have good awareness level of MFs as shown in
Figure 3. This could be attributed to the wide publicity given to the MF industry by the
media and investor education programs organized by AMFI from time to time. However it
should be noted that this study was based in the towns of Komarapalayam, Tiruchengode and
Namakkal of Namakkal District, where the awareness level would be considerably high. The
challenge would be to educate the less aware investors about the advantages of investing in
MFs companies to the traditional saving instruments in order to encourage investment in
mutual funds.

We further analyzed the relationship between awareness and the demographic variables like
gender, age and income. We formulated three hypotheses to test their independence using the
chi-square test. The results are tabulated and interpreted herein.

Hypotheses
H01: Awareness is independent of gender
H02: Awareness is independent of age
H03: Awareness is independent of income

Gender
From chi-square tests (Table 4), it is evident that awareness of investors is independent of
gender. The null hypothesis is accepted at significance level of 54%. It is found that
awareness of respondents is not dependent in respect of gender.
 Table 4: Results of Chi-Square Test for Hypothesis H01
Awareness
Total
0.00 1.00
Male 21 58 79
Gender
Female 7 14 21
Total 28 72 100
Chi-Square Tests
Value df Asymp.Sig (2-sided)
Pearson Chi-Square 0.375 1 0.540

Age
From Table 5, we can infer that the conceptual awareness of investors is significantly
dependent on age as we can reject the null hypothesis at significance level of 6.7% or more.
In other words, awareness is dependent on age. It is found that respondents belonging to ‘less
than 40’ age bracket are well aware of the MFs as compared to the respondents of ‘higher
than 40’ age bracket. This can probably be attributed to the fact that they are risk-averse and
are generally inclined towards parking their funds in government securities, bank deposits,
LIC, etc. Thus AMCs have a major role in creating awareness amongst the respondents
belonging to higher age group which in turn will fetch a considerable amount of investment
for the industry.

Table 5: Results of Chi-Square Test for Hypothesis H02

Awareness
Total
0.00 1.00
Below 30 9 31 40
31–40 4 21 25
Age
41–50 9 9 18
Above 50 6 11 17
Total 28 72 100
Chi-Square Tests
Value df Asymp.Sig (2-sided)
Pearson Chi-Square 7.156 3 0.067

Income
From Table 6, we can infer that the conceptual awareness of investors is significantly
dependent on their level of income. We can reject the null hypothesis at significance level of
11.1% or more. It is found that respondents having monthly income below 300,000 are well
aware of the MFs in comparison to the respondents having monthly income more than
300,000. This can probably be attributed to the fact that people belonging to low income
group are more cautious about their money. Hence, before parking their hard earned money
in different available investment avenues, they always gather as much information possible.
But it is just the opposite in the case of the respondents belonging to the higher income
bracket, who mostly depend on the brokers and advisors.

Table 6: Results of Chi-Square Test for Hypothesis H03

Awareness
Total
0.00 1.00
Below 100000 6 10 16
100001-300000 7 37 44
Income
300001-500000 9 17 26
Below 100000 6 8 14
Total 28 72 100
Chi-Square Tests
Value df Asymp.Sig (2-sided)
Pearson Chi-Square 6.004 3 0.111

Further Suggestions
 Since the investor’s preference for liquidity is found to be high, we suggest more of
the new schemes to be open-ended.
 AMCs should endeavour to design suitable schemes to meet the multiple needs of
adequate returns, safety and liquidity in a reasonable proportion as these features have
rated high by individual investors.
 Investors can be categorized into various segments such as young families with small
or no children looking for high returns, middle-aged people saving for retirement,
retired people looking for regular income and suitable products can be designed to
meet the preference of each class.
 Products such as growth and balanced schemes for young families and income
schemes with regular and reasonable returns for retired people can be designed and
marketed to the right customers.
 Pension funds are likely to be a big driver for the MF industry in the new future. So
they need to design suitable funds and market the same effectively.
 Negative perceptions and unawareness among investors about MFs could be tackled
through appropriate investor education measures.
 It is suggested that AMFI may set aside a percentage of membership fee that it
collects from the AMCs and create a fund for Investor Education Programs.
 Advisory services are becoming more critical to investors and independent financial
advisors and planners are becoming popular.
  Banks are planning to enter the advisory services in a big way and this would open an
extensive distribution channel given the customer base of the banks.
 An entirely new distribution channel can be created consisting of professional
advisors, as in the case of life insurance agents, who will exert substantial influence
on what products investors will buy.
 Electronic sale financial products are gaining volumes with the widespread
acceptability of e-buying. Therefore, AMCs should establish friendlier and easily
accessible ‘automated response systems’ to encourage the this type of investments.

Conclusion
MF industry is India has a large untapped market. There is a great potential for this industry
as more people are falling back on professional management of their funds at low cost and
minimum risk. This market potential can be tapped by closely scrutinizing investor
behaviour to identify their expectations and design products to suit their risk appetite and
return expectations. Presently, as more and more funds are entering the industry, strategic
marketing decisions of these companies are vital for their survival. Apart from other MF
companies these companies also face competition form saving instruments with varied risk-
return combinations. Investors have become more alert and choosy. Hence, the success of an
MF depends on complete understanding of the psychology of the small investor. Under such
a situation, the present exploratory study is an attempt to understand the financial behaviour
of MF investors in connection with scheme preference and selection which would help the
MFs to gauge the investor expectations and changing perception.

References
1. B.Santhanam (2009), “Financial Services”, Margham Publications, Chennai.
2. Nalini Prava Tripathy (2008), “Financial Services”, Prentice-Hall of India Pvt.Ltd.,
New Delhi.
3. E.Dharmaraj (2008), “Financial Services”, S.Chand & Company Ltd., New Delhi.
4. Soumya Saha and Munmum Dey, “IUP Journal of Management Research”, Volume
X, 2011
5. Raja Rajan, “Investment Size Based Segmentation of Individual Investors”,
Management Researcher, 1997
6. www.amfiindia.com
 Appendix

Questionnaire
1. Name (Optional)
2. Sex: Male Female
3. Contact No. (Optional)
4. Age in completed years:
Below 30 31-40 41-50 Above 50
5. Occupation:
Professional Business Salaried Retired
6. Annual Income in rupees.
Below 1,00,00 1,00,001–3,00,000 3,00,001–5,00,000 Above 5,00,000
7. How much do you save annually (in rupees)
Less than 50,000 50,001 to 1,00,000 Above 1,00,000
8. Objectives of your savings are:
To provide for retirement For tax reduction
To meet contingencies For children’s education
For purchase of assets

9. What is your current preference of savings avenue? (Rank from 1 to 10)

Currency Bank Deposit Life Insurance
Pension and Provident Fund Shares Units of UTI and MF
Postal Savings Chits Real Estate Gold

10. What is your current attitude towards the following financial instruments in the Indian
Capital market?
Highly Somewhat Not very Not at all
Favourable
Favourable Favourable Favourable Favourable
Shares
Debentures
Mutual Fund
Bonds
11. Do you prefer investment in mutual fund to other savings avenue in future?
Yes No Not Sure
12. Generally you prefer the schemes (Rank from 1 to 6)
Growth Schemes Income Schemes Balanced Schemes
Money Market Schemes Tax-saving Schemes Index Schemes
13. You prefer
Open-ended Schemes Close-ended Schemes Interval Schemes
14. You prefer investment in mutual funds due to:
Safety Liquidity Flexibility Good Return
15. How did you come to know about mutual fund investment schemes?
Reference groups ________________________________
Newspapers (general) ________________________________
Newspapers (business) ________________________________
Financial magazines ________________________________
Television ________________________________
Brokers/Agents ________________________________
Mail ________________________________
Stores display ________________________________

16. While contacting the fund or trying to get routine/special information what type of
response you prefer? (please tick on response).
Automated Response Personal Response
Telephonic Response No preference
17. Do you think mutual fund investing is a best alternative to equity investing?
Yes No Do not know
18. Name few mutual funds existing in the Indian capital market at present that you know
________________ __________________ _______________
________________ __________________ _______________
19. Which mutual fund company did you like to invest?
__________________________________________
20. Any other information.
__________________________________________