CHAPTER – I

INTRODUCTION OF THE STUDY

1.1 INTRODUCTION

The Indian financial market is going through an enthralling phase. The

implementation of financial reforms improved the efficiency of the financial

system which essentially constitutes the financial institution, instruments and

the market that together provide necessary framework for mobilization and

allocation of savings. Mutual fund is one such large professionally managed

investment organisation which combines the savings of many investors having

similar investment objectives. In India the central government and the Reserve

Bank of India started Mutual fund industry in 1963 with the formation of UTI.

Now, there are mushrooming mutual fund companies operating in India under

both public and private sectors. Mutual fund designs its schemes to meet the

needs of investors in terms of nature of investment, dividend distribution,

liquidity etc.

In India every mutual fund has team of professionals and inducted fund

managers who possess requisite experience and expertise in the stock market,

money market, debt market and government security market to invest the funds

of investors and reap benefits which are distributed as per the offer document.

Thus, it is essential on the part of investors to understand the offer document

clearly as there is no recourse available.

 During five decades of its existence in India, mutual fund industry has

gone through several structural changes. The industry has seen a spurt in the

number of schemes catering to varied needs of its investors. The investors

expect a return which is much superior to normal return compared to other

investments. The key to the success of mutual fund industry is the perceived

confidence of the investors in the organisation in total. This can be achieved by

the quality of the product in terms of return prospects, risk, liquidity, safety as

well as seriousness and care along with the technical ability for savings

mobilization and customer servicing. “It is essential to educate the investors

and remove any preconceived notions about investing in mutual funds”1.

Though the investors prefer mutual funds for professional management,

diversification, return potential, wide choice of schemes and convenience they

should not forget that stock market related investments have inherent risk.

Investors have to look into past track record of performance of various schemes

of same company and compare with other schemes with similar objectives, Net

Asset Values and the investment charges. They may seek advice of experts; get

information from SEBI (Securities and Exchange Board of India) AMFI

(Association of Mutual Funds in India) and company specific websites before

framing their perception or idea. It is the perception of investors which lead

them to make their investment decision. Thus, studying the perception of

investors towards mutual fund is considered as significant in marketing the

mutual fund and contributing to the economy.

1.2 NEED FOR THE STUDY

The small investors prefer to invest in mutual fund schemes, to garner

the maximum return with minimum risk. The volatility of the stock market,

global financial crisis, mushrooming growth of asset management companies,

numerous schemes, and the inherent risk in the mutual fund industry brought

unexpected changes in the risk-return profile of the investment in mutual fund.

The common investors are not highly aware of the means to select the right

schemes for investing their money. The vulnerability of the problems faced by

the mutual fund investors in recent years turned out their perception towards

mutual fund. In spite of the SEBI regulations and AMFI norms many investors

are affected badly by the poor performance of the mutual fund industry. Thus,

the researcher felt it is important to study the perception of individual investor

towards mutual fund, the factors influencing selection of mutual fund schemes,

the level of satisfaction on mutual fund investment, and the various problems

faced by the investors.

1.3 STATEMENT OF THE PROBLEM

People get most of their needs satisfied through their income, which is

the predominant aspect of every one‟s life. People wish to mount their wealth

by many ways. Investment is one such means to increase the income and

wealth of the individuals. The hard earned money parked in proper investment

avenue will fetch good return. All investors are not experts in making good

investments. Thus, they opt the source offering attractive returns. Though

shares, debentures, bonds, gold and real estate are attractive avenues, direct

monitoring is required to make huge returns from them. Mutual fund is the
special investment choice where intensive direct monitoring by investor is not

need as mutual funds are best managed by professionals. Indian financial

market is flooded with mutual fund schemes matching the expectations of

investors. More than a decade mutual fund is the most preferred investment

avenue in India.

Generally investors are expecting more returns for their investments.

But high returns are always having high risk whereas return on investment

from mutual fund schemes is comparatively low. Hence, the investors are much

discontent with the returns. But certain mutual fund scheme fetches a better

return, which are not aware fully by the investors. Many times the investors are

blinking to select an appropriate and right scheme. For this purpose they are

searching various mutual fund, stock market and investors journals and finally

get more ambiguity. Further they are also confused with company related

mutual fund schemes and bank sponsored mutual fund schemes.

Recently mutual funds failed to satisfy the investors as the returns were

poor and unexpected. Due to lack of awareness and over expectation the

investors who made huge investments in mutual fund burnt their fingers. In

spite of SEBI (Securities Exchange Board of India) regulations and various

campaigns made by AMFI (Association of Mutual Fund Industry) investors

were not protected against risk and their expectations went wrong. Mutual fund

performance was not up to the mark and unexpected loss was faced by

investors due to volatility of stock market, inherent (market) risk involved in

investments of AMC (Asset Management companies), heavy investment

charges.
 After making investment in mutual fund the investors are affected by

uninformed alterations on schemes, lack of transparency and compulsory pre

closure made by the companies,. Many of the mutual fund companies are not

sending the accounts statement to their investors. Uninformed deductions like

risk coverage fee charged against the investment take away a good chunk of

their returns. The investors are not fully educated on the features and intricacies

of mutual fund investment. Research on mutual fund and its contribution for

the investors‟ betterment is meager.

At this juncture, it is felt essential to study various factors influencing

the investors in mutual fund selection, the perception of investors towards

mutual fund and their level of satisfaction towards mutual fund investments

and problems faced by the investors of mutual fund. This will be helpful to the

mutual fund companies to capitalize the investor‟s perception, set right hunch

and expand the knowledge in this field.

1.4 OBJECTIVES OF THE STUDY

1. To study the conceptual framework of Investor‟s investment behaviour in

general and in particular to mutual fund schemes.

2. To measure the perception of individual investors on mutual funds and their

preference on various mutual fund schemes.

3. To analyse the factors influencing the investors in selection of mutual

funds.

4. To analyse the level of satisfaction among investors on various

attributes of mutual funds.

5. To identify the problems faced by investors in mutual fund investment.

1.5 SCOPE OF THE STUDY

This study covers the investor‟s preference on various investment

opportunities in general and mutual fund in particular. The study also measures

the perception and the satisfaction of investors towards mutual fund. An

attempt was also made to analyse the factors influencing investors in selecting

the mutual fund and identify the problems faced by the investors of mutual

fund.

1.6 RESEARCH METHODOLOGY

The validity of any research is based on the systematic method of data

collection and analysis. Both primary and secondary data were used for the

present study. First-hand information was collected from the investors

dwelling in Erode district. For this purpose, the individual investors of mutual

fund from Erode District of Tamil Nadu were selected and surveyed.

1.6.1 Sampling Design

For collecting the primary data, 1022 sample respondents were selected

from six taluks of Erode District by using stratified random sampling method.

In order to collect first-hand information the field survey technique was

employed and the geographical distribution of sample respondents is given

below.
 TABLE - 1.1
GEOGRAPHICAL DISTRIBUTION OF SAMPLE RESPONDENTS

Sl. No. Taluks in Erode district No. of sample

1. Anthiyur 170
2. Bhavani 170
3. Erode 172
4. Gobichettipalayam 170
5. Perundurai 170
6. Sathiyamangalam 170
TOTAL 1022

1.6.2 Sampling Method

Sample of 1022 mutual fund investors dwelling in six Taluks of Erode

District were selected based on Stratified random sampling method.

1.6.3 Data Collection

a) Primary Data

In order to accomplish the objectives of the study, field survey was

undertaken among respondents of diverse milieu with different gender, age

group, educational qualification, occupation, monthly income and residential

area. The first–hand information was obtained through the well framed

questionnaires which were duly issued to them.

b) Secondary Data

Secondary data relating to the study were also collected from leading

dailies, journals, magazines, publications. In addition, websites pertaining to

mutual fund, investments, and stock market were also explored to supplement

the primary data.

1.6.4 Tools for Data Collection

Questionnaire was the main tool used to collect the data from the

selected sample respondents. A well structured questionnaire consisting

relevant questions was framed with the guidance of the Research Supervisor

and research experts. The questionnaire so drafted was pre-tested with a set of

sample respondents in Erode District. After the pilot study, necessary

modifications were incorporated in the questionnaire of this study as

recommended by the Research Supervisor, and the suggestions of the selected

sample respondents.

1.6.5 Construction of Questionnaire

The key facet of the present research was identified through the

preliminary interviews (Pilot study) with randomly selected mutual fund

investors. The questionnaire so drafted was checked by the research supervisor

and sub headed as socio economic factors, investment, and mutual fund

investment. Then, it was issued to a few respondents for a critical view with

regard to wording, format, sequence and the like. The questionnaire was

re-drafted for the ease of accession by individual investor.

1.6.6 Pre-test

The questionnaire intended for the respondents was pre-tested with ten

respondents each from Anthiyur, Bhavani, Erode, Gobichettipalayam,

Perundurai, and Sathiyamangalam taluks of Erode District. After pre-testing,

necessary changes were made in the questionnaire to fit in the current study.
1.7 FRAME WORK OF ANALYSIS

The data thus collected from the primary sources were arranged

systematically and logically tabulated under necessary heads. The tabulated

data were analysed in various aspects for evaluation. The following statistical

tools were employed for analyzing the data.

1.7.1. Percentage analysis

A percentage describes how many parts are there out of one hundred

parts of a particular thing. Percentage Analysis is applied to identify high or

low percent of frequency distribution for better understanding of the data.

1.7.2. Multiple Regression Analysis

The regression is a statistical relationship between two or more

variables. When there are two or more independent variables, the analysis that

describes such relationship is the multiple regressions. This analysis is adopted

where there is one dependent variable that is presumed to be a functionary of

two or more independent variables. In multiple regressions, a linear composite

of explanatory variables is formed in such a way that it has the maximum

correlation with an active criterion variable. The main objective of using this

technique is to predict the variability of the dependent variable (perception of

mutual fund investors), based on its co-variance with all the independent

variables (gender, age, marital status, educational qualification, occupation,

family size, earning members in the family, monthly income of the family,

residential area, annual investment, experience in mutual fund investment,

purpose of investment, investments in mutual fund schemes). It is useful to

predict the level of dependent phenomenon through Multiple Regression

Analysis models, if the levels of independent variables were given. The linear

multiple regression problems are to estimate coefficients a1, a2 ……. an and a0

such that the expression,

Y = a0 + a1x1 + a2x2 + ……………+ an xn

Provides a good estimate of an individual Y score based on the X scores, for

the present study, the estimated coefficients are given as

Y = Perception of mutual fund investors

X1 = Gender

X2 = Age

X3 = Marital status

X4 = Educational qualification

X5 = Occupation

X6 = Family size

X7 = Earning members in the family

X8 = Monthly income of the family

X9 = Residential area

X10 = Annual investment

X11 = Experience in mutual fund investment

X12 = Purpose of investment

X13 = Investment in mutual fund schemes

and a0 + a1 + a2 +……….+ aj are the parameters to be estimated.

1.7.3. Henry Garrett ranking

This technique was used to rank the ten major problems faced by

investors selecting suitable companies to invest their capital. In this method the
respondents were asked to rank the given problems and factors taking into

account the magnitude of the problem or importance of the factor.

The order of merit given by the respondents was converted into ranks by

using the following formula.

100 (Rij – 0.5)

Percentage Position =
Nj

The percentage position of each rank thus obtained was converted into

scores by referring to the table given by Henry Garrett. Then for each factor,

the scores of individual respondents were added together and divided by the

total number of respondents for whom the scores were added. The mean

scores for all the factors were arranged in the order of ranks and inferences

were drawn on their respective scores.

1.7.4. Chi-square test.

To find the degree of influence of the independent variables on the level

of satisfaction, a chi-square (χ2) test was used and the formula is given as

follows.

Σ (Oij – Eij)2
χ2 =
Eij

with Degree of Freedom (D.F.) = (c-1) (r-1)

where, Oij = Observed frequency,

Eij = Expected frequency,

C = Number of Columns,

R = Number of Rows.
1.7. 5. Factor Analysis

Factor analysis is a multivariate statistical technique used to condense

and simplify the set of large number of variables called factors. The essential

purpose of factor analysis is to describe, if possible, the covariance

relationships among many variables in terms of a few underlying, but

unobservable random quantities called factors. All variables within a particular

group are highly correlated among themselves but have relatively small

correlation with variable in a different group. Factor analysis is used to study a

complex behaviour or character in order to identify the major characteristics or

factors considered important by the respondents. This technique is helpful in

identifying the underlying factors that determine and provide an empirical

classification scheme of clustering of variables into groups called factor. In this

study the researcher has used factor analysis to identify the factor which most

influences the individual investor in selecting mutual fund.

1.7.6. Cluster Analysis

Cluster analysis is a multivariate statistical technique which groups

unknown number of persons / objects / occasions into groups such that the

members of each group are having similar characteristics / attributes. The

primary objective of Cluster Analysis is to define the structure of the data and

identifying the most similar observations to place them into groups. The

different groups to be determined in Cluster Analysis are not pre – defined as in

Discriminant analysis. This analysis is ideally suited for segmentation

applications in management research like studying perception of mutual fund

investors. The method of clustering may be either hierarchical or non-

hierarchical or both. The outcome of this analysis is much superior when the

results from the hierarchical order are used for the analysis along with the non-

hierarchical. Thus hierarchical and non- hierarchical techniques should be

viewed as complementary clustering techniques rather than as competing

techniques. In this study the researcher has used clustering techniques for

measuring the level of satisfaction of individual investor towards mutual fund.

[Link] Steps involved in Cluster Analysis

Six steps are basic to the application of most cluster studies.

1) Selection of the sample to be clustered

The sample may be persons, inventory, products, events and any other

objects. Generally, a large set of data are most suitable for cluster analysis.

2) Definition of the variables

The variables on which to measure the objects, events or people

(ex. financial status, market segment characteristics, various media, product

definition and competition definition) have to be decided. The set of variables

selected should describe the similarity between objects in terms that are

relevant to the marketing research problem. The variables should be selected

based on past research theory or a consideration of the hypothesis being tested.

3) Selecting a distance or similarity measure

The computation of similarities among the entities is very essential in

order to group the similar objects together. Similarities can be measured either

through correlation or distance measures. The most common approach is to

measure the similarity in terms of the distance between pairs of objects.

Various distance measures are used in the cluster studies.

4) Selecting a clustering procedure

Clustering procedures can be hierarchical, non-hierarchical or

application of both the methods for better formation of clusters. Hierarchical

clustering is characterized by the development of a hierarchy or tree like

structure. Hierarchical methods can be agglomerative or divisive.

Agglomerative clustering is commonly used in marketing research.

Agglomerative clustering starts with each object in a separate cluster. Clusters

are formed by grouping objects into bigger and bigger clusters. This process is

continued until all objects are members of a simple cluster. Agglomerative

method includes linkage methods, error sum of squares or variance methods

and centroid methods. Under the linkage method, the researcher has used

average linkage method.

5) Selection of mutually exclusive clusters

The number of clusters is selected, based on the dendogram and the

agglomeration schedule. The agglomeration schedule shows all possible

solutions from, clusters 1 to (n-1) clusters, and where n is the number of

respondents / cases. Going up from the bottom of the agglomeration schedule,

the difference in the values of co-efficient column is considered to decide the

number of clusters. The decision of selecting the number of clusters is based on

the volume of difference in the value of co-efficient column one by one from

the bottom of the agglomeration schedule. When the difference in the values

starts decreasing, the number of clusters is stopped with that point where it

starts decreasing.
6) Identifying the clustering variables and assessing the validity of

clustering

The variables to be grouped in each cluster can be identified with the

help of the final cluster centers table. The final cluster table shows mean values

of all the variables in each cluster which helps in the selection of the grouping

variables based on the mean values. Case listing cluster membership shows the

list of cases coming under each cluster. The ANOVA table shows the F values

and variables which are statistically significant.

6. Structural Equation model

Structural Equation Modeling is a very general statistical modeling

technique, which is widely used in the behavioral sciences. The relationships

between the theoretical constructs are represented by regression or path

coefficients between the factors. The interest in SEM is often on theoretical

constructs, which are represented by the latent factors. It can be viewed as a

combination of factor analysis and regression or path analysis. The structural

equation model implies a structure for the co-variances between the observed

variables, which provides the alternative name covariance structure modeling.

However, the model can be extended to include means of observed variables or

factors in the model, which makes covariance structure modeling a less

accurate name.

Structural Equation Modeling provides a convenient framework for

statistical analysis that includes several traditional multivariate procedures like,

factor analysis, regression analysis, discriminant analysis, and canonical

correlation, etc. Structural equation models are often visualized by a graphical

path diagram. The statistical model is usually represented in a set of matrix

equations.
 Structural Equation Modeling has its roots in path analysis, which was

invented by the geneticist Sewall Wright (Wright, 1921). It is still customary to

start a SEM analysis by drawing a path diagram. A path diagram consists of

boxes and circles which are connected by arrows. In Wright‟s notation,

observed (or measured) variables are represented by a rectangle box, and latent

(or unmeasured) factors by a circle or ellipse or square box. Single headed

arrows or „paths‟ are used to define causal relationships in the model, with the

variable at the tail of the arrow causing the variable at the point. Double headed

arrows indicate co-variances or correlations, without a causal interpretation.

Statistically, the single headed arrows or paths represent regression

coefficients, and double-headed arrows co-variances. Extensions of this

notation have been developed to represent variances and means (Mc Ardle, 1996).

Here, the researcher made an attempt to study the awareness of the individual

investor on mutual fund schemes applying Structural Equation Modeling was

applied.

1.8 HYPOTHESIS

Hypothesis is a proposition or a set of propositions set forth as an

explanation for the occurrence of some specified group of phenomena either

asserted merely as a provisional conjecture to guide some investigation or

accepted a highly probable in the light of established facts. It is a predictive

statement, capable of being tested by scientific methods that relates an

independent variable to some dependent variable. The following hypothesises

were used by the researcher in this study.

1. There is no significant relationship between gender of the respondents and

their level of perception towards mutual fund.

2. There is no significant relationship between age of the respondents and their

level of perception towards mutual fund.

3. There is no significant relationship between marital status of the

respondents and their level of perception towards mutual funds.

4. There is no significant relationship between educational qualifications of

the respondents and their level of perception towards mutual funds.

5. There is no significant relationship between occupation of the respondents

and their level of perception towards mutual funds.

6. There is no significant relationship between family size of the respondents

and their level of perception towards mutual funds.

7. There is no significant relationship between number of earning members in

the respondents‟ family and their level of perception towards mutual fund.

8. There is no significant relationship between monthly income of the

respondents‟ family and their level of perception towards mutual fund.

9. There is no significant relationship between residential area of the

respondents and their level of perception towards mutual fund.

10. There is no significant relationship between annual investment of the

respondents and their level of perception towards mutual fund.

11. There is no significant relationship between experience of the respondents

in mutual fund investment and their level of perception towards mutual

fund.

12. There is no significant relationship between respondents‟ purpose of

investment in mutual fund and their level of perception towards mutual

fund.

13. There is no significant relationship between the respondents‟ investment in

mutual fund schemes and their level of perception towards mutual fund.

1.9 Period of Study

The study was confined to a period of 5 years i.e., from 2010 to 2015.

Reviewing the relevant literature on the topic chosen and conceptual

framework took one year six months. The data collection from the primary

sources of information took two years six months. Preparing the master table,

data analysis and interpretation took another six months. Presentation of the

data in the form of the report took an additional six months.

1.10 OPERATIONAL DEFINITION

1. Investment

Investment means conversion of cash or money in to a monetary asset or

a claim on future money for a return. The investment has three elements of viz.,

Risk, Return and Time horizon (investment period).

2. Risk

Risk in investment means the probability of not getting the expected

return or the possibility of loss. Generally the risk is the outcome of various

factors.

3. Return

Return is the main earning from investment which influences the pattern

of investment. Return is the product of yield and capital appreciation if any.

The difference between the purchase price and the sale price is capital

appreciation and yield is the interest divided by its purchase price. The

investors return constitute three component i) Risk free rate, ii) Reward for

parting money (time value of money) and iii) Risk premium (Reward for

undertaking risk).

4. Time Horizon

The investment period otherwise known as time horizon is the third

important component of any investment. Based on the need and future fund

requirement the investors decide the investment period for which they are

going to commit fund in an investment avenue. Longer the duration higher may

be the risk due to uncertainty. On the other hand, short period may also be

insufficient to enjoy a good return. Thus, the investor should have a tradeoff

between risk-return and time horizon before making investment.

5. Total annual investment

Total amount invested by the investors annually in various types of

investments.
6. Investment period

Investment period is the time for which the investor commits his/her

fund in any investment avenue.

7. Individual investor

Individual investor means the individuals who invested their money in

mutual fund and does not cover institutional investors.

8. First generation investor

The first person belongs to a family who make investment in mutual

fund.

9. Age of entry

Age at which investor starts his/her mutual fund investment.

10. Duration of investment

It is very important that how long an individual one holds the

investment. Individuals‟ holding period varies based on their requirement.

Here, the duration of mutual fund investment made by the respondents are

studied under four heads viz., upto 1 year, 2-3 years, 3-4 years and 5 years &

more.

11. Perception

How well an individual investor perceives the fact and likes to invest in

mutual fund.

12. Satisfaction

Satisfaction is the outcome of fulfillment of individual investor‟s

expectation on mutual fund.

1.11 LIMITATIONS OF THE STUDY

1. The study was conducted in Erode district of Tamil Nadu. Hence, the

result may not be generalized to other areas of the country.

2. The sample consists of only individual investors.

3. The study is confined to ten main mutual fund schemes irrespective of

numerous schemes available in the market.

4. The sampling and survey method adopted in this study has its own

limitations. Thus, result of the study is subject to the above limitations.

1.12 CHAPTER SCHEME

This study is organized into five chapters.

A The First Chapter deals with Introduction and clear picture of research

design, which includes Need for the study, Statement of the problem,

Objectives of the Study, scope of the study, Research methodology

adopted, Frame work of analysis, Period of the study, Operational

definitions, and Limitations of the study.

A The Second Chapter focuses on the Review of the Literature pertaining

to the study.

A The Third Chapter presents the conceptual framework of mutual fund

investment.

A The Fourth Chapter covers the Data analysis and interpretation of the

study.

A The Fifth Chapter recapitulates the key findings, suggestions and

conclusion of the study.

REFERENCE

1. Nalini Prava Tripathy (2010), Mutual Funds Emerging Trends in India –

Emerging Trends, Excel Books, New Delhi.

2. Richard A. Johnson, Dean W Wichern (2003), Applied multivariate

statistical analysis, Third edition, Eastern Economy Edition, pp: 396-442.