Source:
E-mail dt. 14.10.2012
Investors’
perceptions of mutual fund risks - An empirical study
R.
Vasudevan
Research scholar, Mahatma Gandhi
University, Megalaya
and
Dr.
Peermohaideen
Associate Professor of Commerce
Khader
moideen college of Arts & science, Adhirampattinam
The Mutual Fund
Industry is a fast growing sector of the Indian Financial Markets. They have become major vehicle for
mobilization of savings, especially from the small and household savers for
investment in the capital market. Mutual
Funds entered the Indian Capital Market in 1964 with a view to provide the
retail investors the benefit of diversification of risk, assured returns, and
professional management. Every type of
investment, including Mutual Funds, involves risk. Risk refers to the
possibility that investors will lose money (both principal and any earnings) or
fail to make money on an investment. A Fund's investment objective and
its holdings are influential factors in determining how risky a fund is.
Reading the prospectus will help the investors to understand the risks
associated with that particular Fund. The study aimed to understand and
analyze investor’s perceptions of such risks and expectations, and unveil some
extremely valuable information to support financial decision making of Mutual
Funds. The detailed analysis revealed
that investors perceive risk as under performance, risks in Mutual Fund
investments are medium and the returns on Fund investments are not so
satisfactory.
Keywords: Mutual Fund, Investors, Risk, Perception, and Return
Introduction
The Mutual Fund Industry is a fast growing sector of the Indian Financial Markets. They have become major vehicle for mobilization of savings, especially from the small and household savers for investment in the capital market. Mutual Funds entered the Indian Capital Market in 1964 with a view to provide the retail investors the benefit of diversification of risk, assured returns, and professional management. Since then they have grown phenomenally in terms of number, size of operation, investor base and scope. Being a part of financial markets although Mutual Funds industry is responding very fast by understanding the dynamics of investor’s perceptions towards rewards, still they are continuously following this race in their endeavor to differentiate their products responding to sudden changes in the economy. Every type of investment, including Mutual Funds, involves risk. Risk refers to the possibility that investors will lose money (both principal and any earnings) or fail to make money on an investment. A Fund's investment objective and its holdings are influential factors in determining how risky a fund is. Reading the prospectus will help the investors to understand the risks associated with that particular Fund. Thus, it is time to understand and analyze investor’s perceptions of such risks and expectations, and unveil some extremely valuable information to support financial decision making of Mutual Funds.
Review of
Literature
A
number of studies have been made on the working of Mutual Fund industry. Many of them are general topics like study of
operations, growth and development of Mutual Funds, perceptual views of
investors on Mutual Funds.
In
this sequence, Nalini Prava
Tripathy (2006)1
in her empirical study “Market Timing Abilities and Mutual Fund Performance- An
Empirical Investigation into Equity Linked Saving Schemes” evaluated the market
timing abilities of Indian Fund managers of thirty-one tax planning schemes in
India over the period December, 1995 to January, 2004 by using Jensen and Mazuy Model and Henriksson and
Merton model. The study indicates that
the Fund managers have not been successful in reaping returns in excess of the
market; rather they are timing the market in the wrong direction. P. Hnaumantha Rao and Vijay KR. Mishra (2007)2 in their article “Mutual
Fund: A Resource Mobiliser in Financial Market” made
a critical study of the role performed by Mutual Funds as a financial service
in Indian Financial Market. Gajendra Sidana and Debashis Acharya (2007)3 in their article “Classifying
Mutual Funds in India: Some Results from Clustering” made an attempt to
classify hundred Mutual Funds employing cluster analysis and using a host of
criteria like the 1 year annualized return, 3 year annualized return, 5 year annualized
return, alpha, beta, R-squared, Sharpe’s ratio, mean and standard deviation
etc.
Miglani (2007)4
in his study made an attempt to understand the Mutual Fund industry and its
implications on the common investors on one hand and its returns and performance
on the other. An analysis was made on the perceptual views of investors in
“Investment Decision Making: An empirical study of perceptual View of
Investors” by Yesh Pal Davar
and Suveera Gill (2007)5. The results of this study suggest that investor’s
preferences are supposedly related to the actual performance of investments and
the same is taken into account while forming an opinion about making future
investment decision. In their study
entitled “A study on Investors perception towards Mutual Fund investments”, S. Sudalaimuthu and P. Senthil Kumar
(2008)6 was concentrated on
highlighting the investor awareness and preference in Mutual Fund schemes,
factor that influences the investor in selecting Mutual Fund scheme, the level
of satisfaction on the investment of Mutual Fund, problems faced by Mutual Fund
investors and the investment objectives, preference among Fund types(balanced,
growth, dividend etc.). An Empirical Study of “Indian Individual Investors’ Behaviour” by Syed. Tabassum Sultana (2010)7 was an attempt to know
the profile of the investors and also to know their characteristics so as to
know their preference with respect to their investments. The study also tried to unravel the influence
of demographic factors like gender and age on risk tolerance level of the
investors.
Need for the
Study
In
general, investments in Funds are risky, because they are exposed to economic
forces or factors, which the future is uncertain. By its very nature, risk
concerns the uncertain future. If investors know what happened to a Fund’s
returns in the past, they can predict the likely range of Fund’s returns in
future. The greater is this range, the more risky are Fund’s prospects. Thus,
investors and their advisors need more information to help them assess the
risks of Mutual Funds.
Ignorance
of Law is no excuse. Investors must
ultimately be responsible for understanding or making predictions about the
regulations and risks associated with the major market sectors, as well as the
extent to which sectors are likely to move with one another. Much of this
information is common to many Funds and can be most efficiently provided to
investors by third parties, such as financial planners and database providers.
But, most of the investors are not aware of the complete information about the
risks. Various studies were made on the Mutual Funds, but the research on the
investors’ perceptijons towards risk disclosures of
Mutual Funds was scanty. Hence, it is necessary to find out how the companies
are providing information about the investments to the investors, whether that
information is sufficient to educate the
investors regarding the risks of Funds; and how for the investors are
benefited.
Objectives of
the Study
The
primary objective of the present study is to analyze the investors’ perceptions
of the Mutual Fund Risks. The following are the specific objectives of the
study
1)
To
study the investors’ perceptions of risk;
2)
To
study the investors’ perceptions of Mutual Fund risks: and
3)
To
study the investors’ satisfaction over return on Mutual Funds.
Hypothesis
The
following are the hypotheses set for the study
i.
H0
: The age of the investors and their perception of risk are independent
ii.
H0
: The marital status of
the investors and their opinion on risks associated with Mutual Funds are
independent and
iii.
H0:
The annual income of the investors and their opinion on risks associated with
Mutual Funds are independent.
Methodology
Database - The present study was conducted
by gathering both Primary and Secondary data.
The primary data was collected through a questionnaire and the Secondary
data was collected from Journals, Books, Magazines, News Papers, and websites
of various statutory and non-statutory organizations such as Association of
Mutual Funds in India, Securities and Exchange Board of India.
Sample size -
A
survey was undertaken through questionnaires for the purpose of studying the
above objectives. Investors who invested
in Mutual Funds constitute the universe of the study. The Survey was conducted among 555
geographically dispersed
investors spread over 12
urban and semi-urban areas in four districts of Rayalaseema
region of Andhra Pradesh in India.
Period of the Study - The survey was
conducted for the period of six months i.e. from September 2010 to November
2010.
Tools of analysis - The data drawn from various sources are analyzed with the help of statistical tools and techniques such as percentages and Chi- square tests.
Chi-square (χ2) = ∑ (Observed
frequency – Expected Frequency)2
Expected Frequency
Results and
Discussion
Table 1 shows the
demographics of the sample respondent investors. 90.09 per cent of the respondents were male,
39.64 per cent of the respondents were in the age group of 40-50years, 79.28
per cent of the respondents were married, 55.86 per cent of the respondents
were employees and 55.86 per cent of the respondents were earning less than
Rs.100000 per annum.
Perceptions of Mutual
Fund Risks
Generally
speaking, risk and potential return are related. This is the risk/return
trade-off. Higher risks are usually taken with the expectation of higher
returns at the cost of increased volatility. While a Fund with higher
risk has the potential for higher return, it also has the greater potential for
losses or negative returns. The investors’ perceptions of risk were shown in Table 2. Majority of the investors (52.25 per cent)
believe Risk as under performance (low returns) which indicates the curiosity
of the investors to earn income.
Testing of
Hypothesis I
From
the particulars mentioned in Table 3, the
first hypothesis was tested (Values were shown below in Table 3) and obtained the values as under-
H0: The age of the
investors and their perception of risk are independent.
Calculated Value
= 108.29 and Table Value 7.815 ((for 3 df,
at 5 per cent level of significance). Since the calculated value of Chi-square
is greater than the table value of Chi-square for 3 df at five per cent level of significance, the H0
is rejected. The biggest risk of investing in a Mutual Fund is
underperformance. When an investor decides to invest in a particular Fund, he
typically expects to get the return that the benchmark of the asset
provides. Keeping this in mind, the
investors were asked to express their opinion on risks associated with Mutual
Funds and the values were depicted in Table
4
Majority
of the investors (56.58 per cent) felt that the risks associated with Mutual
Funds are medium. Interestingly,
majority of the un-married investors (63.48 per cent) felt that the risks in
Funds are very low. In contrast to this,
most of the married investors (65 per cent) opined that the risks are medium. Majority of the investors whose age is more than
50 years (63.33 per cent) opined that risk refers to both loss of principal and
as well as income. All the investors
whose income is above Rs. 6 lakhs felt that the risks
in Mutual Funds are low. Majority of
the investors whose income is less than Rs. 1 lakh
said that the risks in Mutual Funds are medium.
Testing of
Hypothesis II
From
the particulars mentioned in Table 5, the
second hypothesis was tested (Values were shown below in Table 5) and obtained the values as under:
H0: The marital
status of the investors and their opinion on risks associated with Mutual Funds
are independent.
Calculated
Value = 16.5691 and Table Value 5.991 ((for 2 df, at 5 per cent level of significance). Since the
calculated value of Chi-square is greater than the table value of Chi-square
for 2 df at five per cent
level of significance, the H0 is rejected.
Testing of
Hypothesis III
From
the particulars mentioned in Table 6, the
third hypothesis was tested (Values were shown below in Table 6) and obtained the values as under
H0: The annual
income of the investors and their opinion on risks associated with Mutual Funds
are independent.
Calculated
Value = 116.19 and Table Value 9.488 ((for 4 df, at 5 per cent level of significance). Since the
calculated value of Chi-square is greater than the table value of Chi-square
for 4 df at five per cent
level of significance, the H0 is rejected.
The most disappointing finding is that 53.15 per cent of the Fund investors are just satisfied with respect to the returns which in fact reveal their dissatisfaction over the Funds’ performance.
Table 1 –
Demographics of the sample respondents
|
Particulars |
Number of
respondents |
Percentage to
total |
|
Gender |
||
|
Male |
500 |
90.09 |
|
Female |
55 |
9.91 |
|
Total |
555 |
100.00 |
|
Age |
||
|
Below 40 years |
215 |
38.74 |
|
40-50 years |
220 |
39.64 |
|
50-60 years |
60 |
10.81 |
|
Above60 years |
60 |
10.81 |
|
Total |
555 |
100.00 |
|
Marital status |
||
|
Unmarried |
115 |
20.72 |
|
Married |
440 |
79.28 |
|
Total |
555 |
100.00 |
|
Occupation |
||
|
Employee |
310 |
55.86 |
|
Business |
130 |
23.42 |
|
Others |
115 |
20.72 |
|
Total |
555 |
100.00 |
|
Annual income |
||
|
Less than Rs.100000 |
310 |
55.86 |
|
Rs.100001 to Rs. 300000 |
195 |
35.14 |
|
Rs.300001 to Rs.600000 |
35 |
6.31 |
|
Rs.600001 to Rs.1000000 |
10 |
1.8 |
|
Above Rs.1000000 |
5 |
0.9 |
|
Total |
555 |
100.00 |
Source: Survey report
Table 2 -
Investors’ Perceptions of risk
|
|
Number of
respondents |
Percentage to
total |
|
Under performance (Returns) |
290 |
52.25 |
|
Loss of principal amount |
112 |
20.18 |
|
Loss of principal and return |
153 |
27.57 |
|
Total |
555 |
100.00 |
Source: Survey report
Table 3 -
Age-wise Investors’ Perceptions of Risk
|
Age |
Under performance |
Loss of Principal amount |
Loss of Principal amount and Return |
Total |
|
Less than40 years |
158 (011) |
37 (012) |
20 (013) |
215 |
|
40-50 years |
104 (021) |
42 (022) |
74 (023) |
220 |
|
50-60years |
16 (031) |
23 (032) |
21 (033) |
60 |
|
More than 60 years |
12 (041) |
10 (042) |
38 (043) |
60 |
|
Total |
290 |
112 |
153 |
555 |
Source: Survey Report
Values in parentheses represent the observed values.
|
Calculated
Value |
108.29 |
|
Table Value |
7.815 |
|
Degree of
freedom |
3 |
Table 4 -
Investors’ Opinion on Risks Associated With Mutual Funds
|
Degree of
risks in Mutual Funds |
Number of respondents |
Percentage to Total |
|
High |
136 |
24.50 |
|
Medium |
314 |
56.58 |
|
Low |
105 |
18.92 |
|
Total |
555 |
100.00 |
Source: Survey Report
Table 5 -
Marital status-wise Opinion on Risks Associated with Mutual Funds
|
Marital status |
High |
Medium |
Low |
Total |
|
Un married |
24 (011) |
18 (012) |
73 (013) |
115 |
|
Married |
112 (021) |
286 (022) |
32 (023) |
440 |
|
Total |
136 |
314 |
105 |
555 |
Source: Survey Report
Values in parentheses represent the observed values.
|
Calculated
Value |
16.5691 |
|
Table Value |
5.991 |
|
Degree of
freedom |
4 |
Table 6 - Annual Income-wise
Opinion on Risks Associated with Mutual Funds
|
Income level |
High |
Medium |
Low |
Total |
|
Less
than Rs. 1,00,000 |
83 (011) |
204 (012) |
23 (013) |
310 |
|
Rs.
1,00,000 to Rs. 3,00,000 |
39 (021) |
101 (022) |
55 (023) |
195 |
|
Rs.
3,00,000 to Rs. 6,00,000 |
14 (031) |
9 (032) |
12 (033) |
35 |
|
Rs.
6,00,000 to 10,00,000 |
0 (041) |
0 (042) |
10 (043) |
10 |
|
Above
Rs. 10,00,000 |
0 (051) |
0 (052) |
5 (053) |
5 |
|
Total |
136 |
314 |
105 |
555 |
Source: Survey Report
Values in parenthesis represent the observed values.
|
Calculated
Value |
116.19 |
|
Table Value |
9.488 |
|
Degree of
freedom |
4 |
Table 7 -
Investors’ Satisfaction over Return on Mutual Funds
|
Particulars |
Highly
Satisfied |
Moderately
Satisfied |
Satisfied |
Not Satisfied |
|
Return |
15 |
143 |
295 |
102 |
Source: Survey Report
Findings of the Study
· Most of the
investors opined that risk is under performance (52.25 per cent)
· 56.58 per cent
of the investors felt that the risks in Mutual Funds are medium (56.58 per
cent).
· Most of the
unmarried investors stated that the risks in Mutual Funds are low (63.48 per
cent).
· In contrast to
unmarried investors, 65 per cent of married investors said that the risks in
Mutual Funds are medium.
· Majority of the
investors whose age is more than 60 years (63.33 per cent) opined that risk
refers to both loss of principal and as well as income.
· All the
investors whose annual income is above Rs. 6 lakhs
felt that the risks in Mutual Funds are low.
· Majority of the
investors whose annual income is less than Rs. 1 lakh
said that the risks in Mutual Funds are medium.
· Most of the
investors were just satisfied with respect to the return on Funds.
Suggestions
§ As majority of
the respondent investors are much more anxious with the prior information
pertaining to risks in investing, the Mutual Fund companies (MFCs) have to
think about higher levels of disclosures in this regard.
§ As majority of
the investors feel the risk as under performance, Mutual Fund companies may
work hard to offer the returns as expected by them.
§ The MFCs may
concentrate on mobilizing the resources from the investors whose annual income
exceeds Rs. 6 lakhs as they feel that the risks in
Mutual Funds are low.
§ MFCs may
concentrate on unmarried investors for their resource mobilization.
§ As every
investment involves risk, the MFCs may try to educate the investors about risks
by conducting awareness programmes.
§ The Fund
Managers should precisely concentrate on portfolio construction so as to
generate more returns.
§ The MFCs may try
to mobilise the funds from the people other than
employees opening information centers in different areas of the country.
Conclusion
The
present study endeavored to throw a light on the investors’ perceptions of
Mutual Fund risks. Understanding the
requirements of investors by the Mutual Fund Companies has become necessary to
accelerate the required
pace of growth. A detailed analysis of
risk perceptions of the investors was made in this study. Survey findings of this study have got
significant implications that can be adopted
by the Fund companies either by
adding to the existing practices or by replacing.
References
1.
Nalini Prava Tripathy (2006), “Market
Timing Abilities and Mutual Fund Performance- An
Empirical Investigation into Equity Linked Saving Schemes”, Vilakshan, XIMB Journal of Management, August 21, pp.127-138.
2.
P.
Hanumantha Rao and Vijay
KR. Mishra (2007), “Mutual Fund: A Resource Mobiliser in Financial Market”, Vidyasagar Unversity Journal of Commerce, Vol.12, March .
3.
Gajendra Sidana and Debashis Acharya (2007), “Classifying Mutual Funds in India: Some
Results from Clustering”, Indian Journal
of Economics and Business, Vol. 6, No. 1, pp.71-79.
4.
S.K.
Miglani (2007), (PhD Thesis-Abstract) “Performance Appraisal of Mutual Funds in
India: Empirical Evaluation of Risk and Timings Performance”, Finance
India, Vol. XXIV No.2, June 2010, pp. 549-552.
5.
Yesh Pal Davar and Suveera Gill (2007),
“Investment Decision Making: An empirical study of perceptual view of Investors”, Indian Institute of Management, Lucknow Journal, Vol. 6, No. 2, 2007, pp. 115-135.
6.
Sudalaimuthu and P. Senthil Kumar (2008), “A study on Investors perception
towards Mutual Fund Investments”, Journal
of Management Trends, Vol. 5, No. 1, September 2007 – March 2008, pp.
106-117.
7.
Syed Tabassum Sultana (2010), “An empirical study of Indian individual
investor’s behaviour”, Global Journal of Finance and Management, Volume 2, Number 1, pp.
19-33.