Factors that lead to investment in Mutual Funds (A study of investor behavior)

I.INTROD !TION A Mutual Fund pools the money of people with certain investment goals. The money invested in various securities depending on the objectives of the mutual fund scheme and the profits (or loss) are shared among investors in proportion to their investment. nvestments in securities are spread across a wide cross!section of industries and sectors. "iversification reduces the ris# because all stoc#s may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with $uantum of money invested by them. nvestors of mutual funds are #nown as unit holders. The profits or losses are shared by the investors in proportion to their investment. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A Mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money collected from investors is invested in capital mar#et instrument such as shares% debentures and other securities. The income earned through these investments and the capital appreciations reali&ed are shared by its units holder in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment to the common man as it offers an opportunity% to invest in a diversified% professionally managed bas#et of securities at relatively low cost. Mutual funds can be invested in many different #inds of securities. The most common are cash% stoc#% and bonds% but there are hundreds of sub!categories. 'toc# funds invest primarily in the shares of a particular industry% such as technology or utilities. These are #nown as sector funds. (ond funds can vary according to ris# (e.g.% high!yield or jun# bonds% investment!grade corporate bonds)% type of issuers (e.g.% government agencies% corporations% or municipalities)% or maturity of the bonds (short! or long!term). (oth stoc# and bond funds can invest in primarily ).'. securities (domestic funds)% both ).'. and foreign securities (global funds)% or primarily foreign securities (international funds).Most mutual funds* investment portfolios are continually adjusted under the supervision of a professional manager% who forecasts the future performance

of investments appropriate for the fund and chooses those which he or she believes will most closely match the fund*s stated investment objective. A mutual fund is administered through a parent management company% which may hire or fire fund managers. Mutual funds are liable to a special set of regulatory% accounting% and ta+ rules. )nli#e most other types of business entities% they are not ta+ed on their income as long as they distribute substantially all of it to their shareholders. Also% the type of income they earn is often unchanged as it passes through to the shareholders. Mutual fund distributions of ta+!free municipal bond income are also ta+!free to the shareholder. Ta+able distributions can be either ordinary income or capital gains% depending on how the fund earned those distributions. A mutual is a set up in the form of trust% which has sponsor% trustee% assets management company (AM ,) and custodian. 'ponsor is the person who acts alone or in combination with another body corporate and establishes a mutual fund. 'ponsor must contribute at least -./ of the net worth of the investment managed and meet the eligibility criteria prescribed under the 'ecurities and 0+change (oard(M utual Funds) regulations. The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the schemes beyond the initial contribution made by it towards setting up of Mutual Fund. The Mutual Fund is constituted as a trust by the 'ponsor. Trustee is usually a company (corporate body) or a board of trustees (body of individuals). The main responsibility of the trustee is to safeguard the interest of the unit holders and also ensure that AM, functions in the interest of investors and in accordance with the 'ecurities and 0+change (oard of ndia (Mutual Fund) 1egulations 2334 the provisions of the Trust deed and the offer "ocument of the respective schemes. The AM, is appointed by the Trustees as the investment Manager of the Mutual Fund. The AM, is re$uired to be approved by '0( to act as an asset management company of the Mutual Fund. The AM, if so authori&ed by the Trust "eed appoints the 1egistrar and Transfer Agent to agent the mutual fund. The registrar processes the application form% redemption re$uests and dispatches account statements to the unit holders. The 1egistrar and Transfer agent also handles communications with investors and updates investor records.

".".AD#ANTA$%& OF M T A' F ND&( ".".".Diversification( A large pool of funds from many small investors allows the fund manager to buy wide range of investment. ".".).'i*uidity of Funds(
Most investors re$uire that their investment be li$uid. The investor can redeem their unit trust fund and receive their money in the specified time frame.

".".+,rofessional Mana-ement( nvestment decisions are made by professional fund managers. The investment process adopted is structured and follows basic investment principles outlined in the prospectus and deed. "."...Investment %/0osure For small investor% it is sometimes difficult to invest in particular asset class or certain securities% for e+ample real estate or corporate bonds. Mutual funds ma#e this possible with pool investments from many small investors. ".".1.Investment !ost 5hen ma#ing direct investments% the smaller investors will pay higher transaction cost if compare to large institutional investors due to pre!negotiated fees on large purchase.

".). Ty0es of Mutual Funds ".).".O0en end Mutual funds Mutual funds are referred to as open!end funds for two main reasons6 (i) They are re$uired to redeem (or buy bac#) outstanding shares at any time upon a shareholders re$uest% at a price based on the current value of the funds net assets7 and (ii) 8irtually all mutual funds continuously offer new fund shares to the public.

".).).!lose end Mutual funds( A closed!end fund is an investment company that issues a fi+ed number of shares that trade on a stoc# e+change or in the over!the!counter mar#et. Assets of a closed!end fund are professionally managed in accordance with the funds investment objectives and policies% and may be invested in stoc#s% bonds% or a combination of both. 9i#e other publicly traded securities% the mar#et price of closed!end fund shares fluctuates and is determined by supply and demand in the mar#etplace. ).&TAT%M%NT OF T2% ,RO3'%M 5ith the growing ris# appetite% rising income% and increasing awareness% mutual funds are becoming a preferred investment option compared to other investment opportunities li#e Fi+ed "eposits (F"s) and postal savings that are considered safe but give comparatively low returns. (ut before investing in mutual funds% investors have to study the factors of the economy% industry and company within the investment environment in which they operate. There are several macro economic factors having influence on the investment choices. The researcher intends to study more particularly% the impact of $uantitative economic variables on the investment of mutual funds. The trends of the industry also have to be e+amined from time to time. n response to the changing circumstances% the fund houses have introduced a host of interesting technological innovations to capture the attention of the investors. nvestors need to correctly judge the ris#s and rewards of investing in schemes which see# to offer attractive returns. (ecause of these situations% the current research will be conducted to analy&e the factors leading towards investment in Mutual funds.

+.O34%!TI#%& 2. To gain insight #nowledge about Mutual Funds.

:. To #now the awareness of Mutual funds among different investors. ;. To study and e+plore the impact of various demographic factors on investors attitude towards mutual fund.

-. To study about the factors (on the basis of ran#) responsible for the selection of mutual funds as an investment preference.

+.R%#I%5 OF 'IT%RAT R% <aslem(:.2:) discussed important relationships between individual investors and e$uity mutual funds that affect investor choices. Most li#ely the largest $uestion is why both sophisticated and unsophisticated investors persist in investing in actively managed funds that generally provide one thing !!! underperformance. Actively managed funds have histories of investing in advertising because they have found that it wor#s in increasing assets under management. Funds have learned that investors =chase fund performance= in the mista#en belief that the past predicts future performance. Funds further ta#e advantage of investors by increasing advertising when current past performance is high. nvestors are encouraged to ma#e fund choices based on advertising because they are generally unsophisticated% uninformed% and have low financial literacy% including lac# of #nowledge of both transparent and opa$ue fund e+penses and fees. 'ingh and >ha (:..3) conducted a study on awareness ? acceptability of mutual funds and found that consumers mostly prefer mutual fund due to return potential% li$uidity and security and they were not absolutely aware about the systematic investment plan. The invertors will also judge various factors before investing in mutual fund. "esigan et al (:..4) conducted a study on women investors perception towards investment and found that women investors basically are unsure in investing in mutual funds due to various factors li#e lac# of #nowledge about the investment security and their various investment measures% mar#et fluctuations% various ris#s related with investment% judgment of investment and redressal of grievances about their various investment related problems. 'avings is a habit specially personified into women. 0ven in the past% when women mainly depended on their spouses income% they used to save to meet emergencies as well as for future activities. n those days% women did not have any understanding about various investment means. (ut as time passed% the circumstances have totally changed. 1amamurthy and 1eddy (:..@) conducted a research to e+plore latest trends in the mutual fund

industry and draw a conclusion that the main benefits for small investors due to efficient management% diversification of investment% easy administration% nice return potential% li$uidity% transparency% fle+ibility% affordability% wide range of choices and a proper regulation governed by '0( . The study also analy&ed about recent drifts in mutual fund industry li#e various e+it and entry policies of mutual fund companies% various designs related to real estate% commodity% bullion and precious metals% entering of ban#ing sector in mutual fund% buying and selling of mutual funds through online. Anand and Murugaiah (:..-) had studied various tactical issues associated to the mar#eting of financial services. They found that recently this sort of industry needs new strategies to stay alive and for operation. For surviving they have to adopt new mar#eting strategies and strategies that enable them to capture ma+imum opportunities with the lowest ris#s in order to enable them to survive and meet the competition from various mar#et players globally. Aoel ,apon (233-) in a study BAffluent investors and mutual fund purchasesC stated that there are many facts that supports that in spite of ris# and return other features also effect on mutual fund selection% for e+ample a consumer survey 233. on mutual fund it was founded that past performance and level of ris# are two aggregate important factors but other factors also effect li#e management fee% amount of sales charges% reputation of fund family% funds already owned in family% recommendation from maga&ine and information sheet and transparency of accounting statements. nvestor showed different behavioral trait and they prefer different factors while selecting fund because of different demographic bac#ground. ..R%&%AR!2 M%T2ODO'O$6 The research is fundamentally an analytical study based on primary research as well as also related to the analysis of the attitude of investors towards mutual funds. n order to conduct this study% 2@. investors will be selected by sampling method and mainly $uestionnaire has been used for collecting the data. All the data re$uired for this analytical study will be ac$uired mostly from primary sources% but at times% secondary sources of data will also be considered. The data collection process will be used to obtain the desired information from primary sources has been through direct interview and $uestionnaire. An individual investor will be considered as

a sampling unit. >udgment sampling will be used for colleting the sample. The research $uestions are6 2) 5hat factors are more valued (despite of ris# ? return) by investors while doing investment decisionsD :) 5hat are determinants of investor behavior that impact on their investment choicesD ..). DATA ANA'6&I& To analy&e the responses software pac#age 'E'' 24 and spread sheets will be used.A<E techni$ue will be used to test the relative importance of weight age of factor that are valued by investors.A<E is multicriteria decision ma#ing techni$ue.A<E is used with spread sheets. Factor analysis will be used to find out most important variables among large group of variables.

R%F%R%N!%& 2. Anand% '. and Murugaiah%8.(:..-)%Mar7etin- of financial services( strate-ic issues8 ',M' >ournal of ndian Management. :. Avadhani% 8. A. (:..;)% Investment mana-ement8 'aujanya (oo#s 9td% Aew "elhi. "esigan et al (:..4)% 5omen Investors9 ,erce0tion To:ards Investment( An em0irical &tudy8 ndian >ournal of Mar#eting. ;. ,apon% A.% F. >. Fit&simons% et al. (233-). =Affluent investors and mutual fund purchases.= International Journal of Bank Marketing 2:(;)6 2G!:@. -. <aslem >ohn A. (:.2:)% ;Mutual Funds and Individual Investors( Advertisin- and 3ehavioral Issues<. @. Eandian% E. (:..;)% &ecurity Analysis = ,ortfolio Mana-ement8 8i#as Eublication Evt. 9td. 4. 1amamurthy% (. M. and 1eddy% '. (:..@)% Recent Trends in Mutual Fund Industry8 ',M' >ournal of ndian Management. G. 'ing h% (. H. and >ha% A . H. (:..3)% BAn em0irical study on a:areness = acce0tability of mutual fundC% -3!@@% 1egional 'tudents ,onference% ,5A .