Quants Final Report

8/6/2019 Quants Final Report

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FACTORS AFFECTING INVESTORS PREFERENCE FOR MUTUAL FUNDS IN INDIA 1

IBS HYDERABAD

Submitted to: Submitted by:

Dr. P. Sashikala Prasoon Thakur-09BSHYD0577

Angela Thomas-09BSHYD0096

U Nataraj-09BSHYD0935

Nipun Malhotra-09BSHYD0524

Subrat Jain-09BSHYD0860

REPORTON

INVESTORS PREFERENCEFOR MUTUAL FUNDS

IN INDIA


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CONTENTS

ntroduction

Objective..Literature Study..

ethodologySample Selection.

nalysis of the Data CollectedData Distribution..

Conclusion

eferences

3

5

6

8

10

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INTRODUCTION

The project contains the brief description of the mutual fund industry in general and its

references. A survey was conducted to gather primary data to judge the factors that influence

investors before they invest in any of the investment tools and thus the first part of the paper

scrutinizes the investor's perception and analyzes the relation between the features of the products and

the investors' requirements. With this back ground an attempt has been made in this paper to

categorize investors based on various demographic factors such as age, sex, income level and occupation.

It is widely believed that MF is a retail product designed to target small investors, salaried people

and others who are intimidated by the stock market but, nevertheless, like to reap the benefits of

stock market investing. At the retail level, investors are unique and are a highly heterogeneous group.

Hence, designing products that are customer tailored to the different needs is important. Currently

there are more than 2500 schemes with varied objectives and AMCs are competing against eachother by Launching new products or repositioning old ones. MF industry today is facing competition not

only from within the industry but also from other financial products that provide many of the same

economic functions as mutual funds but are not strictly MFs. Thus the paper attempts to study the

factors influencing the fund/scheme selection behavior of Retail Investors who invest in Mutual

funds.

INVESTMENTS

Savings form an important part of the economy of any nation. With the Savings invested in various

options available to the people, the money acts .As the driver for growth of the country. Indian financial

scene too presents a Plethora of avenues to the investors. Though certainly not the best or Deepest of

markets in the world, it has reasonable options for an ordinary Man to invest his savings.

An investment can be described as perfect if it satisfies all the needs of all Investors. So, the starting

oint in searching for the perfect investment would be to examine investor needs. If all those needs are

met by the investment, then that investment can be termed the perfect investment.

Most investors and advisors spend a great deal of time understanding the merits of the thousandsof investments available in India. Little time however, is spent understanding the needs of the investor

and ensuring that the most appropriate investments are selected for him.


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MUTUAL FUNDS

Mutual Funds over the years have gained immensely in their popularity. Apart from the

many advantages that investing in mutual funds provide like diversification, professional

management, the ease of investment process has proved to be a major enabling factor. However,

with the introduction of Innovative products, the world of mutual funds nowadays has a lot to

offer to its investors. With the introduction of diverse options, investors needs to choose a mutual

fund that meets his risk acceptance and his risk capacity levels and has similar investment

objectives as the investor.

With the plethora of schemes available in the Indian markets, an investors needs to evaluate and

consider various factors before making an investment decision. Since not everyone has the time

or inclination to invest and do the analysis himself, the job is best left to a professional. Since

Indian economy is no more a closed market, and has started integrating with the worldmarkets, external factors which are complex in nature affect us too. Factors such as an increase in

short-term US interest rates, the hike in crude prices, or any major happening in Asian market

have a deep impact on the Indian stock market. Although it is not possible for an individual

investor to understand Indian companies and investing in such an environment, the

process can become fairly time consuming. Mutual funds (whose fund managers are paid to

understand these issues and whose Asset Management Company invests in research) provide an

option of investing without getting lost in the complexities.

Most importantly, mutual funds provide risk diversification: diversification of a portfolio is

amongst the primary tenets of portfolio structuring, and a necessary one to reduce the levelof risk assumed by the portfolio holder. Most of the investors are not necessarily well qualified

to apply the theories of portfolio structuring to their holdings and hence would be better

off leaving that to a professional. Mutual funds represent one such option.

DEFINITION-A Mutual Fund is a trust that pools the savings of a number of investors who

share a common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned through these

investments and the capital appreciation realized are shared by its unit holders in proportionto the number of units owned by them. Thus a Mutual Fund is the most suitable investment for

the common man as it offers an opportunity to invest in a diversified, professionally

managed basket of securities at a relatively low cost.


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OBJECTIVE

To categorize investors as being inclined towards investment products based on certaincharacteristic such as age, occupation, annual income and objective of Investment.

In order to examine the issues raised above, this paper has the following objectives before it:1) To understand the savings revenue preference among MF investors

2) To identify the features the investors look for in Mutual Fund products


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LITERATURE STUDY

Mutual funds are a topic which is of enormous interest not only to researchers all over the

world, but also to investors. Mutual Funds as a medium-to-long term investment option arepreferred as a suitable investment option by investors. However, with several market entrants the

question is the choice of mutual fund. The study focuses on this problem of mutual fund

selection by investors. Though the investment objectives define investors preference among

fund types (balanced, growth, dividend etc.) the choice of fund based on a sponsors reputation

remains to be probed. Investment performance of mutual funds irrespective of whether they are

public-sector sponsored or Private-sector sponsored, researchers do not investigate the influence

of portfolio characteristics and the variable effect of diversification on mutual fund performance.

LITERATURE on mutual fund performance evaluation is enormous. A few research studies that

have influenced the preparation of this paper substantially are discussed in this section.

Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance.

Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has

suggested a new predictor of mutual fund performance, one that differs from virtually all those

used previously by incorporating the volatility of a fund's return in a simple yet meaningful

manner.

Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual

funds. This paper uses a technique called conditional performance evaluation on a sample of

eighty-nine Indian mutual fund schemes.Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to

randomly select conventional funds of similar net assets to investigate differences in

characteristics of assets held, degree of portfolio diversification and variable effects of

diversification on investment performance. The study found that socially responsible funds do

not differ significantly from conventional funds In terms of any of these attributes.

Based on the diversity of studies made, we intend to concentrate on one aspect of it. By the end

of the project period we intend to reach a point where we have a better understanding of mutual

funds and investor preferences, also have clarity of markets, the risk and return aspect and other

factors, in the process.


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This project has been influenced by the research we made, the feedback, diverse ideas and

opinions we got which not only helped us with the project but also helped us realize the diversity

in behavior and approach in dealing with mutual funds and other securities based on various

factors.


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METHODOLOGY

In financial markets, "expectations" of the investors play a vital role. They influence the price of the

securities; the volume traded and determines quite a lot of things in actual practice. These expectations'

Of the investors are influenced by their "perception" and humans generally relate perception to action.

The objective of the survey was to categorize investors as being inclined towards investment

roducts based on certain characteristic such as sex, age, occupation, annual income etc. In

addition the time horizon of investment and the real need/purpose of investment were studied and

Categorized based on the above demographic factors.

It was also intended to examine the different intrinsic factors of a mutual fund scheme and different

environmental forces that motivate a investor to choose a particular mutual fund scheme.

MARKET SURVEY:

ESIGNING A QUESTIONAIRE

To understand the savings avenue preference, scheme preference, time horizon for investment and

objectives for investment in MFs, and to identify the information sources influencing scheme selection,

and the preferred mode of communication, a questionnaire was designed and

the respondents were asked to rank their preferences on a ranking scale. The ranks were

ascertained by obtaining the weighted mean value of the responses.

To identify the factors that influence the investors fund/scheme selection, 4 variables were identified

through evidence from past research. Based on theory, past research, and personal judgment, the

factors that could influence the investors in their selection of Mutual funds/schemes.


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Age Distribution in Sample Occupational Distribution in Sample Annual Income Distribution in Sample Objective for Investment in Mutual Fund

AMPLE SELECTION

Survey was conducted on 75 investors. The survey was conducted during July-Aug 2009.

The required data was collected through a questionnaire which was Administered through different

techniques i.e. - through telephone, emails.

OBJECTIVE

Safety

Liquidity

Tax Benefit

Dividend

Capital Appreciation

RANK

1

4

3

2

5


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ANALYSIS OF THE DATA COLLECTED

ANALYSIS TOOLS

Here we are using two tools for analysis of the data collected. The objective is to determine

whether Mutual funds are preferred by the investors. The two tools involved are:

CHI-SQUAREA chi-square test (also chi-squared or 2 test) is any statistical hypothesis test in

which the sampling distribution of the test statistic is a chi-square distribution when

the null hypothesis is true, or any in which this is asymptotically true, meaning that

the sampling distribution (if the null hypothesis is true) can be made to approximate a

chi-square distribution as closely as desired by making the sample size large enough.

ANOVAIn statistics, analysis of variance (ANOVA) is a collection of statistical models, and their

associated procedures, in which the observed variance is partitioned into components due

to different explanatory variables, usually called factors in Design of experiments. The

initial techniques of the analysis of variance were pioneered by the statistician and

geneticist R. A. Fisher in the 1920s and 1930s, and are sometimes known as Fisher'sANOVA or Fisher's analysis of variance, due to the use of Fisher's F-distribution as part

of the test of statistical significance.


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DATA Distribution for different Investments in India

Age WiseDistribution

Age

Mutual

Fund

Fixed

Deposit Life Insurance

Postal

Service

s

Stock

s

Provident

Fund

below 30 9 0 1 0 4 2

30-40 6 4 2 1 3 3

40-50 5 3 3 1 3 5

Above 50 5 1 6 3 2 3

Total 25 8 12 5 12 13

Occupation Wise Distribution

Occupation

Mutual

Fund

Fixed


Postal

Service

s

Stock

s

Provident

Fund

Businessma

n 8 2 4 0 6 0

Salaried 13 4 1 2 4 9

Retired 4 2 7 3 2 4

Total 25 8 12 5 12 13


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Annual Income Wise Distribution

Income

Mutual

Fund

Fixed


Postal

Service

s

Stock

s

Provident

Fund

400000 5 2 5 0 4 7

Total 25 8 12 5 12 13

Objective for Investment

Objective

Mutual

Fund

Fixed

Deposit

Life

Insurance

Postal

Services Stocks

Provident

Fund

Tax Benefit:10 0 3 0 3 7Capital

Appreciation: 8 0 0 0 4 0

Return 5 3 4 2 2 2

Liquidity 0 0 0 0 3 0

Safety 2 5 5 3 0 4

Total 25 8 12 5 12 13


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(1) Age Wise Distribution

(a)Calculation for Chi-Square

H0 : Preference for type of investment does not depend on age

H1 : Preference for type of investment does depend on age

Age

Mutual

Fund

Fixed

Deposit

Life

Insurance

Postal

Services Stocks

Provident

Fund Total

below

30 9 0 1 0 4 2 1630-40 6 4 2 1 3 3 19

40-50 5 3 3 1 3 5 20

Above

50 5 1 6 3 2 3 20

Total 25 8 12 5 12 13 75

Row Column f0

fe =

RT*CT/n f0 - fe

(f0 -

fe)2 (f0 - fe)

2/fe

1 1 9 5.33 3.67 13.444 2.521

1 2 0 1.71 -1.71 2.913 1.707

1 3 1 2.56 -1.56 2.434 0.951

1 4 0 1.07 -1.07 1.138 1.067

1 5 4 2.56 1.44 2.074 0.810

1 6 2 2.77 -0.77 0.598 0.216

2 1 6 6.33 -0.33 0.111 0.018

2 2 4 2.03 1.97 3.894 1.921

2 3 2 3.04 -1.04 1.082 0.356

2 4 1 1.27 -0.27 0.071 0.056

2 5 3 3.04 -0.04 0.002 0.001

2 6 3 3.29 -0.29 0.086 0.026

3 1 5 6.67 -1.67 2.778 0.417

3 2 3 2.13 0.87 0.751 0.352

3 3 3 3.20 -0.20 0.040 0.013


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3 4 1 1.33 -0.33 0.111 0.083

3 5 3 3.20 -0.20 0.040 0.013

3 6 5 3.47 1.53 2.351 0.678

4 1 5 6.67 -1.67 2.778 0.417

4 2 1 2.13 -1.13 1.284 0.602

4 3 6 3.20 2.80 7.840 2.450

4 4 3 1.33 1.67 2.778 2.083

4 5 2 3.20 -1.20 1.440 0.450

4 6 3 3.47 -0.47 0.218 0.063

2

17.268

Degrees of freedom = (4-1) x (6-1) = 15

For = 0.05 , tabulated Chi-Square = 24.996

Hence, we accept H0which says that preference for type of investment does not depend on

age.

(b) Calculation for ANOVA

H01: 1= 2= 3=..= i


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ANOVA

Source of

Variation SS df MS F P-value F critRows 1.791667 3 0.597222 0.2015 0.893727 3.287382

Columns 58.375 5 11.675 3.939082 0.017598 2.901295

Error 44.45833 15 2.963889

Total 104.625 23

Conclusion:

(i)Row Wise

As Fcritical is greater than Fcomputedtherefore H01 is accepted.

(ii)Column Wise

As Fcritical is less than Fcomputedtherefore H12 is accepted.


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(2)Occupation Wise

Distribution

Occupation

Mutual

Fund

Fixed

Deposit

Life

Insurance

Postal

Services Stocks

Provident

Fund Total

Businessman 8 2 4 0 6 0 20

Salaried 13 4 1 2 4 9 33

Retired 4 2 7 3 2 4 22

Total 25 8 12 5 12 13 75


Ho:Preference for Type of Investment and Occupation are independent

H1:Preference for Type of Investment is dependent on Occupation

a=0.05

Degrees of

Freedom=

(Total rows-1)*(Total

Columns-)

(3-1)*(6-1)

10

Row Column f0

Row

Total(RT)

Column

Total(CT) fe=(RT*CT)/n

((fo-

fe)^2)/fe

1 1 8 20 25 6.666667 0.2666667

1 2 2 20 8 2.133333 0.0083333

1 3 4 20 12 3.2 0.2

1 4 0 20 5 1.333333 1.3333333

1 5 6 20 12 3.2 2.45

1 6 0 20 13 3.466667 3.46666672 1 13 33 25 11 0.3636364

2 2 4 33 8 3.52 0.0654545

2 3 1 33 12 5.28 3.4693939

2 4 2 33 5 2.2 0.0181818

2 5 4 33 12 5.28 0.310303


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2 6 9 33 13 5.72 1.8808392

3 1 4 22 25 7.333333 1.5151515

3 2 2 22 8 2.346667 0.0512121

3 3 7 22 12 3.52 3.4404545

3 4 3 22 5 1.466667 1.6030303

3 5 2 22 12 3.52 0.6563636

3 6 4 22 13 3.813333 0.0091375

2 21.108159

Tabulated Value at 0.05 Significance Level= 18.307

Computed value= 21.108

Here the Computed Value comes out to be greater than the Tabulated value hence theNull Hypothesis is rejected.

Conclusion: H1 is accepted i.e. Preference for Type of Investment is dependent

On Occupation.


ANOVA: Two-Factor Without

Replication

H01: 1= 2= 3=..= i


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SUMMARY Count Sum Average Variance

Row 1 6 20 3.333333 10.66667

Row 2 6 33 5.5 21.1

Row 3 6 22 3.666667 3.466667

Column 1 3 25 8.333333 20.33333

Column 2 3 8 2.666667 1.333333

Column 3 3 12 4 9

Column 4 3 5 1.666667 2.333333

Column 5 3 12 4 4

Column 6 3 13 4.333333 20.33333

ANOVA

Source of

Variation SS df MS F P-value F crit

Rows 16.33333 2 8.166667 0.830508 0.463786 4.102821Columns 77.83333 5 15.56667 1.583051 0.250591 3.325835

Error 98.33333 10 9.833333

Total 192.5 17

Conclusion:

(i)Row Wise


(ii)Column Wise



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(3)Annual Income Wise

Distribution

Income

Mutual

Fund

Fixed

Deposit

Life

Insurance

Postal

Services Stocks

Provident

Fund Total

400000 5 2 5 0 4 7 23

Total 25 8 12 5 12 13 75

(a)Chi-

squareWe have to check if a person's choice is affected by the income of that person or not.

This can be checked using chi-square.

Ho: Income and preference are independent


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3 2 4 2.56 1.44 2.0736 0.81

3 3 5 3.84 1.16 1.3456 0.35042

3 4 0 1.6 -1.6 2.56 1.6

3 5 5 3.84 1.16 1.3456 0.35042

3 6 3 4.16 -1.16 1.3456 0.32346

4 1 5 7.666667 -2.6667 7.111111 0.92754

4 2 2 2.453333 -0.4533 0.205511 0.08377

4 3 5 3.68 1.32 1.7424 0.47348

4 4 0 1.533333 -1.5333 2.351111 1.53333

4 5 4 3.68 0.32 0.1024 0.02783

4 6 7 3.986667 3.01333 9.080178 2.27764

2 50.1434

Degrees of freedom=(row-1)(column-1)=(4-1)(6-1)=3*5=15

therefore, from the table, the value is 24.996

Here, the calculated value is much higher than the table

value.

i.e., the value lies outside the acceptance region so we reject the null hypothesis

and accept the alternate hypothesis that the preference and income are dependent on each other.


H01: 1= 2= 3=..= i


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ANOVA: Two-Factor Without Replication

SUMMARY Count Sum Average VarianceRow 1 6 9 1.5 3.5

Row 2 6 19 3.166667 15.36667

Row 3 6 24 4 5.6

Row 4 6 23 3.833333 6.166667

Column 1 4 25 6.25 14.25

Column 2 4 8 2 2.666667

Column 3 4 12 3 6

Column 4 4 5 1.25 6.25

Column 5 4 12 3 3.333333Column 6 4 13 3.25 6.916667

ANOVA

Source of

Variation SS df MS F P-value F crit

Rows 23.45833 3 7.819444 1.237363 0.330973 3.287382

Columns 58.375 5 11.675 1.847473 0.163932 2.901295

Error 94.79167 15 6.319444

Total 176.625 23

Conclusion:

(i)Row Wise


(ii)Column Wise



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(4)Objective for

Investment

Objective

Mutual

Fund Fixed Deposit

Life

Insurance

PostalService

s Stocks

Provident

Fund Total

Tax Benefit:

10 0 3 0 3 7 23

Capital

Appreciation:

8 0 0 0 4 0 12Return 5 3 4 2 2 2 18

Liquidity 0 0 0 0 3 0 3

Safety 2 5 5 3 0 4 19

Total 25 8 12 5 12 13 75


Ho:Preference for Type of Investment and Objective are independent

H1:Preference for Type of Investment is dependent on Objective

a=0.05

Degrees of Freedom= (Total rows-1)*(Total Columns-1)

(5-1)*(6-1)

20

Row Column

Row Total

(RT)

Column

Total(CT) fo fe

(fo-

fe)^2/fe

1 1 23 25 10 7.67 0.71

1 2 23 8 0 2.45 2.45

1 3 23 12 3 3.68 0.13

1 4 23 5 0 1.53 1.53

1 5 23 12 3 3.68 0.13

1 6 23 13 7 3.99 2.28

2 1 12 25 8 4.00 4.00

2 2 12 8 0 1.28 1.28

2 3 12 12 0 1.92 1.92

2 4 12 5 0 0.80 0.80

2 5 12 12 4 1.92 2.25

2 6 12 13 0 2.08 2.08

3 1 18 25 5 6.00 0.17


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3 2 18 8 3 1.92 0.61

3 3 18 12 4 2.88 0.44

3 4 18 5 2 1.20 0.53

3 5 18 12 2 2.88 0.27

3 6 18 13 2 3.12 0.40

4 1 3 25 0 1.00 1.00

4 2 3 8 0 0.32 0.32

4 3 3 12 0 0.48 0.48

4 4 3 5 0 0.20 0.20

4 5 3 12 3 0.48 13.23

4 6 3 13 0 0.52 0.52

5 1 19 25 2 6.33 2.96

5 2 19 8 5 2.03 4.36

5 3 19 12 5 3.04 1.26

5 4 19 5 3 1.27 2.37

5 5 19 12 0 3.04 3.04

5 6 19 13 4 3.29 0.15

2

51.88

Tabulated Value at 0.05 Significance Level= 31.41

Computed value= 51.8774

Here the Computed Value comes out to be greater than the Tabulated value hence the NullHypothesis is rejected

To conclude H1 is accepted i.e. Preference for Type of Investment is dependent on Objective


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H01: 1= 2= 3=..= i


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Conclusion:

(i)Row Wise


(ii)Column Wise



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CONCLUSION

As per the calculation, the preference for investment type is affected/not affected by different

variables as follows:

As per Chi-Square:

Factor Effect

Age No

Occupation Yes

Annual Income Yes

Objective of Investment Yes

It is evident from the above analysis the choice of investment depends upon all the factors except

Age.

As per ANOVA:The Calculations of ANOVA reveal that there is Homogeneity within the whole set of data withrespect to type of investment and annual income, type of investment and objective of investment

and type of investment and occupation of the investor except for the type of investment and agefactor.


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REFERENCES

1. www.moneycontrol.com2. www.amfiindia.com

3. www.wikepedia.com

4. www.investopedia.com

5. Statistics for management (Pearson) by Richard I.Levin and David S.Rubin

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