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Investors Perception on Tax Saving Mutual Funds in Tamil Nadu

 

N.S.Santhi

Assistant Professor

Dept. of Business Administration

KSR College of Engineering

Tiruchengode – 637 215

 

Dr. K. Balanaga Gurunathan

Professor

Dept. of Management Studies

KSR College of Technology

Tiruchengode – 637 215

 

Abstract

 

Though this research work, Investors preferences and their knowledge on investment can be identified. The investors will be considering various investment avenues which provide high return but they may not consider the risk factors involved. This study may help the investors to get right information about the various risk factors involved and their impact on return of the investment. This study also helps the investors to know the role of various agencies and their involvement in attending grievances redressal on investment

 

Introduction

 

Investment is saving money and engaging into something with the expectation of earning profit in future. It is the commitment of money to gain profitable returns in the form of Interest, Dividend and Appreciation of money. There are various avenues are available in the financial market such as Fixed Deposit, PPF, NSC, Insurance, Real Estate, Mutual Funds, Securities etc., Other than the returns, investor expects various benefits on the investment such as, Protection, Convenient, Brand, Tax relaxation, Security, Low cost and Transparency etc., There are investor who is ready to bear the risk to have high returns and there are some investor they are averse of taking risk. Mutual fund is supposed to a better avenue for the individual investor whereby their investment collected and diverted to the capital market to generate better returns for them with lower volatility and risk. Individual investor generally enters into the stock market to get better return, tax benefits and safety on their investment etc. The taxpaying community likely to utilize various ways to reduce their taxable income under Income Tax Act 1961 through Section 80C, 80 CCC, 80CCF and 80D. Under these section, deduction is allowed from taxable income in respect of investment made in some schemes such as Life insurance Premiums, Employee Provident Fund, National savings Certificates, Unit Linked Insurance Plan, Equity Linked Savings of Mutual funds, Fixed deposit with Banks, Deposits in National Bank for Agriculture and Rural Development, etc., Through these schemes an individual can avail up to Rs. 1.60 lakh deduction from their Gross total Taxable Income.

 

An Investor can avail tax deduction of up to Rs. 1,00,000 from Equity Linked Savings Scheme(ELSS) of Mutual funds also known as tax saving mutual funds. There are more than 35 tax saving mutual fund schemes are offered by 32 Asset Management Companies(AMCs). The regulating authorities like Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI) monitoring and regulating mutual fund industries and trying to protect the investors in India. There are Grievances redressal to solve the Investors’ grievances on their investment companies and the regulating authorities organizing various awareness programme to create awareness among the investors. Hence, the following objectives have been framed to address the identified areas on Tax Saving mutual funds.

 

Tax Saving Mutual Funds

 

Mutual Fund is a trust that pools savings of number of investors who share a common financial goal. Mutual fund is one of the instruments which satisfy the need of the retail investors one who is seeking the benefits like safety, minimum investment, tax exemption on income, etc., Mutual fund units are one of the investment vehicles that provide a opportunity to participate in the stock market for people who have intention to be part of the security market, no adequate knowledge, unable to invest large amount of money, willing to liquidate in short-term, etc., 

 

Proper tax planning is the basic duty of every person, which should be carried out religiously. Basically, there are three steps in the tax planning exercise.

 

A.     Calculate the taxable income for the financial year (from April 1 to March 31) from all sources such as salary/pension, interest etc.

B.     Calculate tax payable on Annual Taxable Income using a simple tax rate table.

C.     After calculating the amount of tax liability, the investor has two options to choose from

i.        Pay the tax which requires no tax planning.

ii. Minimize the tax through Prudent Tax planning. The investor need not consult an Income Tax Practitioner or a Chartered Accountant for this purpose.

 

While planning for tax reduction/exemption the investor have to compare the advantages of several tax saving schemes and depending upon the age, social liabilities, tax slab and personal preferences. They can decide on the right mix of investments/insurance plans, which shall reduce their tax liability to zero or to the minimum possible.

 

Investors in high tax brackets have purchased municipal bonds to avoid tax and they seek other investment area which gives tax benefits like Bank saving, National Savings Certificates (NSC),  Public Provident Fund (PPF), Kisan Vikas Patra (KVP), Post Office Scheme (POS), Special Schemes For Retiring Person , Postal Life Insurance, etc., Mutual fund is one of the best investment avenues for individual investors those who wants to play in security market with the benefits like low risk, better return and tax protection.

 

The tax-saving mutual fund schemes are one of the important types of mutual funds in India because it invests in equities, where the minimum risk proposition and benefits are susceptible to market fluctuations.  But it is advisable to investigate other benefits and risk before investing into tax saving mutual funds. A person who is planning to invest in tax-saving mutual funds in India, should judge a proposition based on Performance , Investment Approach , Volatility , Expenses, etc.,

 

The amount invested in Equity Linked Savings Schemes (ELSS) is eligible for exemption from Income Tax under Section 80C of Income Tax Act, 1961. These schemes generally have a lock in period of three years. The dividend income received on mutual funds is exempt from income tax in the hands of the investor. According to Securities & Exchange Board India, taxes that are implied on annual salary will be exempted if the investment in tax saving mutual funds. Moreover the returns that the investor earns aren’t taxable.

 

Tax saving mutual fund scheme provides not only tax protection and also minimum return to the investors. The range of minimum investment required for Tax saving mutual fund is Rs.500

 

Analysis and Discussion

 

Investors choose their investment area by calculating risk factors, quality of services delivered.  A structured questionnaire was prepared and primary data has been collected from the investors in Tamil Nadu.  These statements were analyzed by using ranking and rating methodology.

 

Investment in Tax Saving Mutual funds and other avenues.

 

Finding the area to Invest the hard earned money is very essential. Even though there are various avenues to full fill the same kind of needs of the investor only certain areas are attracted the investors. With reference to the data collected from the respondents shown in Table 2. Respondents chosen multiple schemes where they made their investment, majority 36% of the investors invested in SBI tax saving mutual funds, 24% of investors invested in ICICI tax saver fund and limited number of investors invested in DSP black rock tax saver (3%), Principal personal tax saver(3%) and Franklin Templeton tax saver fund(2%). 

 

 

Even though SBI gives lesser benefits than other companies in the market most of the investors preferred to invest SBI only. The reason may be it offers the services like readdressing their grievances, easily approachable, action taken methods for queries from a longer period and it built very good brand name with the customers.

 

The reason for not investing in companies like DSP black rock tax saver, Principal personal tax saver and Franklin Templeton tax saver fund is most of the investor in Tamil Nadu does not aware of these companies and they are not ready to enter into the new avenues. These companies may organize the awareness programme and campaign to create awareness and to attract more investors.  Those who invested in tax saving mutual funds also invested in Term deposits, Insurance, Postal savings and Monthly Income plan maximum.

 

Table -1 Investment in Tax Saving Mutual Funds and other avenues

 

Tax Saving  Mutual Fund Schemes

Term Deposit

Insurance

Postal Savings

Monthly Income Plan

House Construction

Other Savings

Tax Saving HDFC

- 84

39

43

24

17

19

 

Tax Saving Tata

-45

6

41

13

8

8

 

Tax Saving SBI

-144

36

104

61

21

20

2

Tax Saving Reliance

-78

15

58

26

7

10

 

Tax Saving DSP

-11

6

5

2

2

1

 

Tax Saving Kotak Mahendra

-38

18

25

6

13

11

 

Tax Saving Principal Personal

-10

4

5

3

6

 

 

Tax Saving Sundaram BNP Paribas

-72

20

50

32

15

8

 

Tax Saving Franklin templeton

-8

2

5

4

1

 

 

Tax Saving Birla sunlife

-28

11

15

5

8

4

 

Tax Saving ICICI Prudential

-95

35

45

15

12

17

2

Tax Saving Others

-43

3

36

14

11

10

2

 

Relationship of Investors Income and Investment

 

Income has also been considered as one of the important parameter that determines the objective of investment. For the sake of convenient understanding total investors are divided into three groups in relation to their income such as up to 2 lakhs, 2 lakhs to 3 lakhs and above 3 lakhs. Data collected through questionnaire revealed that 43% of investors invested below Rs. 50,000/- in tax saving mutual funds, 28.25% of investors invested in Rs.50,000 to Rs.1 lakhs and 14.25 % of investor invested Rs. 1 lakhs to 1.5 lakhs, 8% of investors invest in 1.5 to 2.0 lakhs, 1.5% investors invest in 2.0 to 2.5 lakhs and 5% of investors invest in tax saving mutual funds. A study at aggregate level tested by chi-square test has shown that investor’s income is considerable determent in investment of tax saving mutual funds at 1% level (x 2=65.213 a, df=12, asymp.sig.000) shown in Table-1.

 

Table 2 – Chi-Square test for amount Invested in Tax Saving Mutual Funds

 

 

Value

df

Asymp. Sig. (2-sided)

Pearson Chi-Square

65.213(a)

10

.000

Likelihood Ratio

66.861

10

.000

Linear-by-Linear Association

46.836

1

.000

N of Valid Cases

400

 

 

 

Relationship of Investors’ age and amount invested in Tax saving Mutual fund

 

Age is one of the factors for doing certain activity. Age factor compel people to do certain activity and prevent them doing certain activity. In this research age is acted as one of the factor that influence the amount invested in tax saving mutual funds. 48% of investors in the age group of 26-35 years are entered into the mutual fund market, 19.75% of investors in the age group of 36-45 years, 14.5% of investors below 25 years, 12.25 % of investor in the age group of 46 to 55 years and only 5.5% investors in the age group of 50 years and above are entered into the mutual fund market. Age is one of the factors making the investors to invest some amount of money in tax saving mutual funds. This is tested by chi square which is significant at 1% level indicate that association exists between age group and investment amount in the tax saving mutual funds.( x 2=99.777 a, df=20, asymp.sig.000).

 

Relationship of Mutual fund option and Return Form.

 

Investors may have varied objective on investment. They may willing to liquidate whenever they want to liquid by accepting wither profit or loss on the settlement or they may wait till the maturity and not to loose their money and they may aim for regular income or growth or both.  61.5% of investors invested open ended schemes and 15% of investors in close ended and 23.25% of invested in type of mutual funds. 56.5% of investors wants growth of their money, 25.5% of investors wants income out their investment and only 18% of investors needs both growth of their money along with income out of their investment. The return intention on mutual fund has association  with mutual fund option which is proved by significance level of chi square at 1% level (x 2=59.901 a, df=4, asymp.sig.000) shown in table 3.

 

Table 3 - Relationship of Mutual fund option and Return Form

 

 

Value

df

Asymp. Sig. (2-sided)

Pearson Chi-Square

59.901(a)

4

.000

Likelihood Ratio

60.061

4

.000

Linear-by-Linear Association

46.003

1

.000

N of Valid Cases

400

 

 

 

Factors considered by Investors

 

All the investors will consider some factors relates to their chosen investment area. There are some common factors which are mostly considered by all the investors. Irrespective of their age, education, investment amount, income they will consider some factors. From the data analysis, it can be noted that most of the investor will consider safety aspect of their investment, closely followed by return potential, reputation and capital appreciation. There are certain factors which not mostly considered. Such as, Diversification, Transparency and low cost.

 

Awareness on Facilities available in tax saving mutual funds

 

All the schemes offered various facilities to increase the investor’s activity towards their schemes and for that purpose they introduce number of new facilities. But very facilities alone used by maximum number of investors.  From the data collected from Tamil Nadu tax saving mutual fund investors, it can be noted that 78% of respondents used Systematic Investment features of tax saving mutual funds, followed by 64.75% of investors used Switchover facility and only 18.5% of investors used Systematic Transfer facility. The purpose of mutual fund is to make retail investors to participate in the stock market. They cannot invest large amount at a time that is the reason most of investors availing the systematic investment feature of Tax saving Mutual fund.

 

Awareness of SEBI Act

 

SEBI is the regulating authority of securities market. It is essential to know about the regulating body. The rights, limitation, facilitation, protection methods are disclosed by the authorities like SEBI for the protection of investors. From the data collection it has been tested the awareness on SEBI is relates to some other properties of the investors.

 

Investor’s Satisfaction

 

Customer satisfaction is the main objective of every organization. In mutual fund market also it is the aim of every AMCs. For that they introduce various products to meet the requirement of all categories of people

.

Relationship of age and Satisfaction

 

Data collected through questionnaire revealed that 77% of investors satisfied with the overall benefits from tax saving mutual funds, 21% of investors neither satisfied not satisfied and negligible amount of (1.75%) investors not satisfied with the overall benefits of tax saving mutual funds. 79.31% of investors in the age group of up to 25 years are satisfied, 26.6% of investors neither satisfied not satisfied with the overall benefits of the tax saving mutual funds. The association between age and satisfaction has been tested by chi-square, that proves that there is an association between age and overall satisfaction of the investors (x 2=44.089 a, df=16, asymp.sig. = 000).

 

Relationship of Gender and Satisfaction

 

Data collected through questionnaire revealed that 83% of male investors satisfied with the overall benefits from tax saving mutual funds and 63% of female investors are satisfied with the overall benefits of tax saving mutual funds. The association between gender and satisfaction has been tested by chi-square, that proves that there is an association between gender and overall satisfaction of the investors (x 2=23.414 a, df=4, asymp.sig. = 000).

 

Relationship of Marital status and Satisfaction

 

Data collected through questionnaire revealed that 79.5% of married investors satisfied with the overall benefits from tax saving mutual funds and 72% of unmarried investors are satisfied with the overall benefits of tax saving mutual funds. The association between marital status and satisfaction has been tested by chi-square, that shows that there is no an association between marital status and overall satisfaction of the investors (x 2=4.957 a, df=4, asymp.sig. = .292).

 

Relationship of Educational Qualification and Satisfaction

 

Education should educate the person in all the ways it is not only imposing the things in terms of syllabus. It should activate the mind of the person. There are certain areas where everyone will behave in a same manner. Irrespective of educational qualification every investor are satisfied with tax saving mutual funds. Those who have qualification up to SSLC 90%, HSC 58%, Diploma/UG 74% and PG Degree holders 78% are satisfied.  From this research analysis it has been tested whether there is an association between the investor’s educational qualification and satisfaction of tax saving mutual fund. Chi-square test is used, that shows the hypothesis is not significant(x 2=11.519a, df=12, asymp.sig. = .485) and there is no association between investors educational qualification and satisfaction of overall benefits of tax saving mutual funds.

 

 

Risk Factors of tax saving mutual fund

 

There are number of factors which affect the performance of the funds and there are certain common factors which are considered as the main by most of the investors. Ranking method is used to analyze the data collected through questionnaire that shown in Table 4. Inflation is considered the main factor closely followed by security market condition and Terrorism are least considered by most of the investors which affects the tax saving mutual fund performance.

 

Table – 4 Factor affecting Tax saving mutual fund

 

Factors which affect the tax saving mutual funds

Mean

Management Affairs

1.80

 

Nature of Business

1.84

 

Management Strategies

2.11

 

Securities Market and Economy

1.78

 

Inflation

1.72

 

Political factor

2.00

 

Government policies

1.89

 

Terrorism

2.39

 

National & International events

2.11

 

\

Using rotation matrix these factors are grouped into three namely external factors, international factors, Company related factors. Terrorism, National & International events grouped into external factors, Securities Market and Economy, Inflation, Political factor, Government policies grouped into internal factor and Management Affairs, Nature of Business, Management Strategies grouped into company related factors. From the analysis, the internal factors are mostly affecting the performance of tax saving mutual fund investors.

 

Conclusion

 

The present study endeavored to give a look on investor’s perceptions towards risk, return and awareness on various aspects of tax saving mutual funds. Understanding of investor’s knowledge and expectations on tax saving mutual funds become necessary to study due to more number of retail investors are involved mainly for the purpose of tax saving, protection and little bit growth on their investment. Most of the investors are averse of mutual funds due the volatility. It should be insisted that the investor can expect maximum return out of their investment but they should not be greed on it. Young investors are interested to invest in tax saving mutual funds, motivation cum awareness programs should be organized by the AMCs along with the regulation authorities. SEBI and AMFI along with the AMCs organized many awareness programme to protect the Investors from the risk and make them aware of the risk factors.  In the financial year 2010-11, AMFI along with 26 AMCs have conducted 4882 Investor Awareness Programs covering 280 cities and 313986 participants.[1] But it is very less for the total population of participants in the securities market. There are various factors with affect the investment behavior, perception and risk return analysis, etc., To bridge the gaps between the investors in terms of their age, profession, gender, income AMCs can organize more number of programme which explain the risk, return, merits, demerits and other features of the product and also they can restructure their existing practices and innovate more new ways of service delivery.



[1] http://www.amfiindia.com, date : 25.02.2011