Thesis( Mutual Fund)1

8/2/2019 Thesis( Mutual Fund)1

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[2007-09]

Study of working of mutual fund & identify the

various factors considered by the customer while

going for investment in Mutual Fund

A report submitted towards the partial fulfillment of the

requirements of the two years full-time MBA

Under the Supervision of

Mrs. Yashika Aggarwal

Faculty LMTSOM

Submitted by

Sumit Gandhi

MBA (Manufacturing)

Roll No: 50702045

[ L M TH A P A R S C H O O L O F MA N A G E M N T ]


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L M Thapar School of Management | Dissertation

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Table of content

TOPIC PAGE NO

EXECUTIVE SUMMARY 3 ABSTRACT

LIST OF FIGURE 5

ACKNOWLEDGEMENT

CERTIFICATE 7

OBJECTIVE 8

INTRODUCTION

LITERATURE REVIEW 11

RESEARCH METHODOLOGY 23

ANALYSIS & FINDINGS 29

CONCLUSION 36

RECOMMENDATIONS

LIMITATIONS

REFERENCES

BIBLIOGRAPHY

ANNEXURE


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EXECUTIVE SUMMARY

The project talks about the various factors considered by the customers while going forinvestment in mutual fund.

The first few pages talk about the introduction and objectives of the study.This is followed by literature review with details about mutual funds.

Next comes the survey, the purpose of which is to study the working of mutual funds, thecharacteristics of mutual funds that attract the investor and what an investor should consider forsafe investment and better returns. The last part consists of analysis, finding, recommendations, ,conclusion, limitations and bibliography. The questionnaire has been annexed to the report.


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ABSTRACT

Growth, both in terms of size and choice, in the mutual fund industry among emergingmarkets has been impressive. However, mutual fund research in emerging markets hardlyexists. This paper intends to fill this gap. In particular, the paper surveys the relativeimportance of factors considered important in the selection of mutual funds by investors &financial advisors in emerging markets. Our survey focuses on Punjab (India) where themutual industry started in the 1963 but only gained importance in the 1987 when there wereplayers outside the UTI, who entered the industry.

Our analysis results in clubbing of all the eight factors into three major components.Component 1 comprise of factors - Risk diversification, Cost of transaction, flexibility. TheComponent 2 comprise of managed by professional, Affiliation of fund & Experience of fundmanager. Performance of previous funds& Return on investment fall in Component 3. All thesefactors are important & must be taken care whenever the investment decision is to be made inMutual Funds.We find that apart from the return & risk diversification past performance, and cost of

transaction are important factors in a mutual fund. Investors & financial advisors are looking for

consistent growth of funds over the long term. They also prefer managers who are experienced

and professionally qualified. As for funds, there is greater affinity for funds which are large and

linked to a government agency. The fund management company should also provide a variety of

funds at lower transaction costs. It is a matter of time before the financial markets in emerging

economies like India are opened to foreign fund companies.

Our findings show that customers in emerging markets look for consistent long-term growth. As

mutual funds in established markets also face the same challenge in their own domestic front,

similar investment strategies may be in order. Transaction costs may prove to be a different

challenge. The initial costs of setting up operations in emerging markets, understanding the local

political, social and economic environment may involve additional costs.


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LIST OF FIGURES

Figure 1 24

Figure 2 25

Figure 3 25

Figure 4 26

Figure 5 26

Figure 6 27

Figure 7 28

Figure 8 29

Figure 9 29

Figure 10 30

Figure 11 31

Figure 12 32

Figure 13 32


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ACKNOWLEDGEMENT

I would like to express my sincere thanks to my Project Guide, Mrs. Yashika Aggarwal forher guidance and support throughout my Project. Her calm demeanor and willingness to teach has

been a great help to me for successfully completion of my project. My learning has been

immeasurable and working under her was a great experience.

My acknowledge heartfelt gratitude to Prof. K.K. Bhattacharya, for his unconditional support.

Without their continuous help the project would not have been materialized in the present form.

Their valuable suggestions helped me at every step.

Finally, I thank my institute LMTSOM & other faculty for making this project successful.

Sumit Gandhi


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CERTIFICATE of originality

This is to certify that the project entitled To study the various factors considered by the

customer while going for investment in Mutual Fund . is the bonafide work carried out by,

Sumit Gandhi student of MBA (MFG), L M Thapar School of Management, Patiala, during the

year 2007-2009, in partial fulfillment of the requirements for the award of the MBA, and that the

project has not formed the basis for the award previously of any degree, diploma, fellowship or

any other similar title.

Signature of the Guide:

Mrs. Yashika Aggarwal

Place:


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ObjectiveMain objective of this study is to identify the various factors considered by the customer while

going for investment in Mutual Fund. This will help a retail investor to decide if he wants to

diversify his portfolio and invest some part of is earning in Mutual Funds, keeping in mind the

level of returns they gives and the risks associated with it.

Major objectives

To study the various factors considered by the customer while going for investment in MutualFund

Sub-Objective

To study the working of mutual fund.

To study the characteristics of mutual fund which attract the investors.

What an investor should consider for safe investment and better returns.


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INTRODUCTION

Mutual funds are an established institution in developed financial markets. The extent to whichresearch, both at the theoretical and technical level, has been conducted in developed markets

indicates the stage of maturity of mutual funds in these markets. In emerging markets, however,mutual funds are a recent phenomenon. Nevertheless, growth has been robust. The amount offunds that are under the purview of professional management is large and increasing. Forinstance, it has been estimated that mutual funds have been growing at an average annual rate of14.4 per cent since 1989, higher compared to the growth in equities and bank deposits(Asiaweek, 2001). The 2000 edition of the Asian Market Entry Study published by RainmakerInformation reported that the Asian pension market[1] was US$ 3 trillion strong, which wasabout a quarter of the US pension fund market (PR Newswire, 2000). Emerging Asianeconomies like China, Indonesia, the Philippines, India and Malaysia are expected to grow bydouble digits annually and projected to reach US$ 12 trillion by the year 2030. This phenomenalgrowth in the mutual fund industry in these emerging markets has resulted in an increase in thenumber of investment companies offering a range of funds. Although the number of funds issmall compared to established markets like the US, the growth is high. Faced with a range ofmutual funds, how does one make choices?

What are the factors that investors look for and is it possible to rank these choices? To whatextent do these factors differ between emerging and established markets? This paper attempts toseek answers to these questions.

Literature in the area of finance, particularly on mutual funds, provides a range of factors thatcontribute to the performance of a particular fund. These include previous performance,management style, expenses, manager tenure and fund age (Petersen et al., 2001; Israelsen,1998). Although the direction and extent to which these factors influence performance varies,ranking these factors according to their importance has scarcely been attempted [2]. In this paperwe attempt to accomplish this by considering the views of financial advisors. This paper is alsodistinct from other mutual fund related papers in that it concentrates on emerging markets,particularly India. The volatility of markets, the extent of regulations and the size of governmentinvolvement are a few factors which distinguish mutual funds in emerging markets from theircounterparts in more established markets. The all too frequent boom and bust cycles that occur inthe Asian and Latin American markets further point to the need for research to be done in thesemarkets. While there is an extensive collection of literature on emerging markets, these mainlyfocus on the US funds investing in the emerging markets (for example Kaminsky et al., 2001;Pomerleano, 1998; Hwang and Satchell, 1998), there is very limited work that has been done onmutual funds that exist in these emerging markets.

This could be due to the difficulties in portfolio evaluation in these markets (Hwang andSatchell, 1998). Nevertheless, the size of available funds in emerging markets and their growthprospect warrants in-depth study into these markets. The distinguishing factors mentioned abovecoupled with the innovative nature of new products adds to the complexity of the mutual fundindustry in emerging markets.


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The lack of information in these emerging markets, both at the descriptive and analytical level,makes the role of financial advisors critical in these markets. The purpose of this paper is toidentify the attributes which financial advisors along with the investors consider relativelyimportant in a mutual fund. Through a survey of previous literature we identify factors thatcontribute to the performance of a mutual fund [3]. The study employs factor analysis to design

the questionnaire and evaluates the perception of these investors & financial advisors in India.The mutual fund industry in India is more than 40 years old but became an important componentof the capital market only in the late 1980s. The results of this study may prove useful to mutualfunds in emerging markets like India as well as fund companies that are considering setting upfunds in these markets.

The remainder of the paper is organized as follows: the following pages review the literaturepresenting industry status in India & identifying the factors that are considered significant inselecting a mutual fund. Next few pages provide a brief overview of the mutual fund industry inIndia. The methodology used in data collection and the method of analysis is discussed infollowing pages. Last section provides the results of our analysis. The paper ends with a

conclusion.


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LITERATURE REVIEW

Mutual Fund

A mutual fund is a common pool of money in to which investors with common investment

objective place their contributions that are to be invested in accordance with the stated

investment objective of the scheme. The investment manager would invest the money collected

from the investor in to assets that are defined/ permitted by the stated objective of the scheme.

For example, an equity fund would invest equity and equity related instruments and a debt fund

would invest in bonds, debentures, gilts etc.

Mutual Fund Operation

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 realised are shared by its unit holders in proportion to 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.

Advantages of Mutual Funds

The advantages of investing in a Mutual Fund are:

Professional Management

Diversification

Convenient Administration

Return Potential

Low Costs

Liquidity Transparency

Flexibility

Choice of schemes

Tax benefits

Well regulated


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Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

No Guarantees: No investment is risk free. If the entire stock market declines in value, the

value of mutual fund shares will go down as well, no matter how balanced the portfolio.

Investors encounter fewer risks when they invest in mutual funds than when they buy and sell

stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing

money.

Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses.

Some funds also charge sales commissions or "loads" to compensate brokers, financial

consultants, or financial planners. Even if you don't use a broker or other financial adviser, you

will pay a sales commission if you buy shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70

percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay

taxes on the income you receive, even if you reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on the fund's manager to

make the right decisions regarding the fund's portfolio. If the manager does not perform as well

as you had hoped, you might not make as much money on your investment as you expected. Of

course, if you invest in Index Funds, you forego management risk, because these funds do not

employ managers


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Types of mutual fund scheme

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position,risk tolerance and return expectations etc. The table below gives an overview into theexisting types of schemes in the Industry.

Open-ended Mutual Fund Schemes in India

There is no fixed maturity for the open-ended mutual fund schemes. One has to deal directlywith the Mutual Fund for his/her redemptions and investments. Liquidity is the key featurehere. Buying and selling of the units becomes convenient at the related prices of the NAV(net asset value). Some of the open-ended fund schemes in India are ING OptiMix ActiveDebt Multi - Manager FoF Scheme, ICICI Prudential Very Cautious Plan and Birla Sun LifeAAF - Aggressive Plan.

Close-ended Mutual Fund Schemes in India

Close -ended schemes are those which have a specified maturity period (which generallyranges from 2 - 15 years). At the time of initial public issue one can make direct investmentin the scheme and can also get the benefit of buying and selling of the units. Due to demandand supply in the market plus the policy holders' expectations and various other marketfactors, the market price may vary from NAV (Net Asset Value). Some of the close-endedfund schemes in India are ING Vysya Dynamic Asset Allocation Fund and Kotak DynamicAsset Allocation Scheme.

Tax-saving Mutual fund Schemes in India

Individuals, companies, partnership firms, and body corporate are some of the investingparties in the various Mutual Funds available in the market primarily to enjoy the benefits oftax saving. The Indian Mutual Funds are guided by principles of general contract framed bySEBI. It provides certain tax benefits to the fund holders. It is mandatory that tax benefitsshould be declared in a column which reads "objects of the offering". SBI Mutual Funds,Prudential ICICI and Bajaj Capital are some of the tax saving Mutual fund companies inIndia.


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Performance of Mutual Funds in India

Let us start the discussion of the performance of mutual funds in India from the day the concept

of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or

rather to those who believed in savings, to park their money in UTI Mutual Fund.For 30 years it goaled without a single second player. Though the 1988 year saw some new

mutual fund companies, but UTI remained in a monopoly position. The performance of mutual

funds in India in the initial phase was not even closer to satisfactory level. People rarely

understood, and of course investing was out of question. But yes, some 24 million shareholders

were accustomed with guaranteed high returns by the beginning of liberalization of the industry

in 1992. This good record of UTI became marketing tool for new entrants. The expectations of

investors touched the sky in profitability factor. However, people were miles away from the

preparedness of risks factor after the liberalization. The Assets under Management of UTI was

Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India

through figures. From Rs. 67bn. the Assets under Management rose to Rs. 470 bn. in March

1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs.

1,540bn. The net asset value (NAV) of mutual funds in India declined when stock prices started

falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into

alternative investments. There was rather no choice apart from holding the cash or to further

continue investing in shares. One more thing to be noted, since only closed-end funds were

floated in the market, the investors disinvested by selling at a loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal,

the losses by disinvestments and of course the lack of transparent rules in the whereabouts

rocked confidence among the investors. Partly owing to a relatively weak stock market

performance, mutual funds have not yet recovered, with funds trading at an average discount of

1020 percent of their net asset value. The supervisory authority adopted a set of measures to

create a transparent and competitive environment in mutual funds. Some of them were like

relaxing investment restrictions into the market, introduction of open-ended funds, and paving

the gateway for mutual funds to launch pension schemes. The measure was taken to make mutual

funds the key instrument for long-term saving. The more the variety offered, the quantitative will

be investors. At last to mention, as long as mutual fund companies are performing with lower

risks and higher profitability within a short span of time, more and more people will be inclinedto invest until and unless they are fully educated with the dos and donts of mutual funds.


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Mutual Fund Companies in India

The concept of mutual funds in India dates back to the year 1963. The era between 1963 and

1987 marked the existence of only one mutual fund company in India with Rs. 67bn assets under

management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end

of the 80s decade, few other mutual fund companies in India took their position in mutual fundmarket.

The new entries of mutual fund companies in India were SBI Mutual Fund, Can bank Mutual

Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual

Fund. The succeeding decade showed a new horizon in Indian mutual fund industry. By the end

of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started

penetrating the fund families. In the same year the first Mutual Fund Regulations came into

existence with re-registering all mutual funds except UTI. The regulations were further given a

revised shape in 1996.Kothari Pioneer was the first private sector mutual fund company in India

which has now merged with Franklin Templeton. Just after ten years with private sector players

penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies

in India.

Major Mutual Fund Companies in India

ABN AMRO:

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt.

Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was

incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual

Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial.Sun Life Financial is a global organization evolved in 1871 and is being represented in Canada,the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual

Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs.10,000 crores


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Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under thesponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOBMutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely HousingDevelopment Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets

(India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the TrusteeCompany of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named TrusteeCompany. It is a joint venture of Vysya and ING. The AMC, ING Investment Management(India) Pvt. Ltd. was incorporated on April 6, 1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largestlife insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th ofOctober, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company formedis Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management CompanyLimited incorporated on 22nd of June, 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. asthe sponsor. Sahara Asset Management Company Private Limited incorporated on August 31,1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs25.8 crore.


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State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshorefund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largestBank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15

have already yielded handsome returns to investors. State Bank of India Mutual Fund has morethan Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakh spread over 18schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsor for TataMutual Fund is Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager isTata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata AssetManagement Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on

April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It ispresently having more than 1,99,818 investors in its various schemes. KMAMC started itsoperations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investorswith varying risk - return profiles. It was the first company to launch dedicated gilt schemeinvesting only in government securities.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTIMutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset ManagementCompany presently manages a corpus of over Rs.20000 Crore. The sponsors of UTI MutualFund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), andLife Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds,Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. Thesponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is theTrustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed


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on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes underwhich units are issued to the Public with a view to contribute to the capital market and to provideinvestors the opportunities to make investments in diversified securities.

Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by StandardChartered Bank. The Trustee is Standard Chartered Trustee Co.Pvt.Ltd.

Franklin Templeton India Mutual Fund

The group, Frnaklin Templeton Investments is a California (USA) based company with a globalAUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups inthe world. Investors can buy or sell the Mutual Fund through their financial advisor or throughmail or through their website. They have Open end Diversified Equity schemes, Open end Sector

Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Incomeand Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading in the market insecurities, investment management and credit services. Morgan Stanley Investment Management(MISM) was established in the year 1975. It provides customized asset management services andproducts to governments, corporations, pension funds and non-profit organisations. Its servicesare also extended to high net worth individuals and retail investors. In India it is known asMorgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan

Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving theneeds of Indian retail investors focusing on a long-term capital appreciation.

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its sponsor.The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated onDecember 1, 1995 with the name Escorts Asset Management Limited.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance CapitalManagement Corp. of Delaware (USA) as sponsored. The Trustee is ACAM Trust Company Pvt.Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate officein Mumbai.


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Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. asthe sponsor and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated

on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management CompanyPvt. Ltd. is the AMC.

Can bank Mutual Fund

Can bank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as thesponsor. Can bank Investment Management Services Ltd. incorporated on March 2, 1993 is theAMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance CompanyLtd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company andAMC is Cholamandalam AMC Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributedRs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust inaccordance with the provisions of the Indian Trust Act, 1882. The Company started its businesson 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog

Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

Future of Mutual Funds in India

By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated thatby 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000crore.The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last5 years we have seen annual growth rate of 9%. According to the current growth rate, by year

2010, mutual fund assets will be double. Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments,

US based, with over US$1trillion assets under management worldwide.


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Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutualfunds sector is required.

We have approximately 29 mutual funds which are much less than US having more than 800.There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentratingon the 'A' class cities. Soon they will find scope in the growing cities.

Mutual fund can penetrate rural like the Indian insurance industry with simple and limitedproducts. SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Objective of the study: To analyze & identify the factors that affects the decision of

investors & fund manager while investing in mutual funds.

Selecting a mutual fund that is able to offer high returns with acceptable risks is a complex task.Literature shows that there are a number of factors that determine the performance of mutualfunds. The purpose of this literature survey is to identify the factors that previous research has

found to be important in the performance of mutual funds. These factors are then used in thedesign of the questionnaire used for data collection.

No one factor has received as much attention in previous literature as past performance becauseit is seen to be the simplest and most direct method to gauge the performance of a mutual fund.Still, there seem to be some doubts as to whether previous performance is a good indicator offuture performance. Some literature seems to find that there is only a slight positive relationshipor no relationship at all between previous performance and current returns (Blake et al., 1993;Bogle, 1992; Brown and Goetzman, 1995; Brown et al., 1992). Others seem to be moreconclusive about the relationship (Grinblatt and Titman, 1992; Hendricks et al., 1993). Goetzmanand Ibbotson (1994) go as far as to show that a two- year performance is predictive of

performance over the successive two years. It is no surprise then that prior returns are the mostimportant source of new money flows into mutual funds (Carhart, 1997; Gruber, 1996; Ippolito,1992). Despite the fact that funds are supposed to warn customers that previous returns do notguarantee future performance, a survey of 298 affluent investors found performance track recordto be one of the four most important criteria for mutual fund selection (Capon et al., 1994). Onthe question of why poorly performing funds still survive, Harless and Peterson (1998) explain


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that investors tend to choose funds based on previous performance but stick to these fundsdespite their poor returns. To what extent the role of past performance influences the choice offunds, relative to other determining factors, is taken up in our survey.

The transaction costs involved in buying and selling of mutual funds or what is known as

expense ratio has been considered by several studies. Blake et al. (1993), Carhart (1997), Elton etal. (1996) and Liljeblom and Loflund (2000), for example, explain that there is an inverserelationship between the expense ratio and mutual fund performance. Ang et al. (1998) explainthat cost increases when fund managers follow an active trading style, as they would require alarge research team. Golec (1996) in fact suggests that investors should avoid funds with a highexpense ratio. Elton et al. (1993) and Ippolito (1989) find evidence that funds with a lowertransaction cost outperform those with higher fees. Nevertheless, Chen et al. (1992) finds apositive relationship between performance and expense ratio. Although we expect the cost oftransactions to be a determining factor, its relative importance to other determining factors is anissue well worth considering.

Do larger mutual funds attract more investments? Shukla and van Inwegen (1995) answer in theaffirmative because larger funds are able to employ more research staff who are then able toprovide more information that would lead to better portfolio selection. This relationship issupported by other studies (Chen et al., 1992; Ang et al., 1998; Golec, 1996). Grinblatt andTitman (1989), however, found an inverse relationship between fund size and performance. Apossible explanation for this finding is that the degree of performance pressure on the fundmanager is so intense that investment style becomes aggressive resulting in frequent change instyle and hence weaker performance. To what extentfund size influences the choice of mutualfund by financial advisors will be addressed by the survey.

The number of funds managed by the investment company may also be an important factor to the

investor. Although previous literature does not emphasize this point, the availability of severaltypes of funds (or boutique funds) with differing objectives may be an attractive feature for theinvestor. The attraction is further enhanced when the investor is allowed to shift between fundswithout incurring a huge fee. In Malaysia, an investment management company handles aboutthree to four funds, though some have a choice of more than ten funds.

The characteristics of the fund manager have received much attention in previous research. Thisis not surprising since the concept of mutual funds basically transfers the duty of stock selectionto the fund managers. Shukla and Inwegen (1995) found that local fund managers were able toproduce better returns compared to foreign managers. This is related to the accessibility of localmanagers to ``street research''. In the context of this paper, managers with greater experienceshould also have more contacts and so access to more information. Ang et al. (1998)commenting on fund managers identify three factors that could yield higher returns superiorskills, valuable information and greater willingness to assume risks. Golec (1996) related returnsto a longer job tenure (or experience) although there is no significant relationship to age. In fact,the same research finds that better risk adjusted performance are produced by managers who areyoung (less than 46 years) but with more experience (greater than seven years). Nevertheless,experience does not ensure success since Porter and Trifts (1998) do not find experience as an


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advantageous factor because in their study a superior performance over a five-year period doesnot correctly predict the performance over the following five years.

Management style matters even when funds are categorized into specific objectives like growth,income, balanced, etc. Although these objectives limit the maneuvering of the manager, Brown

and Goetzman (1997) found that this categorization does not truly reflect the objectives ofmutual funds. They propose 8 different categories of funds that reflect management styles [4].Indro et al. (1998) found that consistency in investment styles among fund managers does matter.Golec (1996) goes further to emphasise that the fund manager's investment style and size ofstocks held explain all the persistence in mutual fund performance.

Finally, education does not seem to have a positive relationship to performance and managersholding an MBA produce weak results. Whether the characteristics and investment style of thefund manager is an influencing factor among financial advisors in emerging markets will beaddressed by the survey.


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Research Methodology

Factor analysis:

A Factor analysis was selected to study the importance of attributes for mutual fund selection.Obtaining a factor solution through factor analysis (principal components analysis) is an iterative

process that usually requires repeating the SPSS factor analysis procedure a number of times to

reach a satisfactory solution.

We begin by identifying a group of variables whose variance we believe can be represented more

parsimoniously by a smaller set of factors, or components. The end result of the factor analysis

will tell us which variables can be represented by which components, and which variables should

be retained as individual variables because the factor solution does not adequately represent their

information.

A principal component factor analysis requires:

o The variables included must be metric level or dichotomous (dummy-coded) nominallevel

o The sample size must be greater than 50 (preferably 100)o The ratio of cases to variables must be 5 to 1 or largero The correlation matrix for the variables must contain 2 or more correlations of 0.30 or

greatero Variables with measures of sampling adequacy less than 0.50 must be removedo The overall measure of sampling adequacy is 0.50 or highero The Bartlett test of sphericity is statistically significant.

The first phase of a principal component analysis is devoted to verifying that we meet theserequirements. If we do not meet these requirements, factor analysis is not appropriate.

The second phase of a principal component factor analysis focuses on deriving a factor model, or

pattern of relationships between variables and components, that satisfies the following

requirements:

o The derived components explain 50% or more of the variance in each of the variables, i.e.have a communality greater than 0.50

o One of the variables have loadings, or correlations, of 0.40 or higher for more than onecomponent, i.e. do not have complex structure

o None of the components has only one variable in it


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To meet these requirements, we remove problematic variables from the analysis and repeat the

principal component analysis procedure in SPSS.

If, at the conclusion of this process, we can substitute the components for the variables in further

analyses if:

o The components have more than one variable loading on them,o The components explain at least 50% of the variance in each of the included variables,

ando Components that collectively explain more than 60% of the variance in the set of

included variables.

Variables that were removed in the analysis should be included individually in further analyses.

Substitution of components for individual variables is accomplished by:

o Using only the highest loading variable in place of the other variables loading on thecomponent,

o Or by combining the variables loading on each component to create a new variable.When evaluating measures of sampling adequacy, communalities, or factor loadings, we ignore

the sign of the numeric value and base our decision on the size or magnitude of the value.

The sign of the number indicates the direction of the relationship (direct or inverse).

A loading of -0.732 is just as strong as a loading of 0.732. The minus sign indicates an inverse

or negative relationship; the absence of a sign is meant to imply a plus sign indicating a direct orpositive relationship.

If there are two or more components in the component matrix, the pattern of loadings is based on

the SPSSRotated Component Matrix. If there is only one component in the solution, theRotated

Component Matrix is not computed, and the pattern of loadings is based on the Component

Matrix.

It is possible that the analysis will break down and we will have too few variables in the analysis

to support the use of principal component analysis.

Based on information from the dataset factor analysis data.sav, we assume that there is no

problematic pattern of missing data, that outliers do not impact the solution and that the analysis

will be supported by a split-sample validation and a test of reliability using a level of significance

of 0.05.


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Our investment decision-making factor model is as follow

Y= b0+bixi (i=1~8) - - - (A)

Where; x1~x8= Factors influencing the investment, given in the questionnaire.

And b0~b8: are constants

Selection of Factors for analysis:

Questionnaire & Sampling

The study was done through collection of primary data. The data was collected from a survey

using a questionnaire as instrument. The questionnaires were put on doc.google.com for online

survey, participant included finance student, professionals, & working people. This sample is

chosen as they represent a group of individuals who have the purchasing power and also the

resources to access and use the Internet. This type of sampling is called choice based sampling.

A questionnaire in English language was developed for this study.

At the end of the survey, a number of 68 questionnaires were filled. The data was analyzed using

SPSS version 14 statistical software package.


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The outline of the questionnaire, the analytical results and their considerations are shown

below:

Main question items

Consumer demographic: Gender, age, history of the investment.

Factors that they consider important while investing in Mutual fund or other funds, viz:

performance of previous funds, cost of transaction, experience of fund manager, flexibility, risk

diversification & return on investment

The questions required them to select from five choices ranging from strongly disagree (1) to

strongly agree (5) with the following statements:

Main results of the questionnaire

Demographics of respondent (Fig 1)

Profile category %

Gender Male

Female

83

17

Age 21-23

24-27

28-30

14.28

55.52

30.20

Income/month (rs) 0-5000

15,000-20,000

21,000-30,000

30,000 & above

19

27

23

31

Type of investor Regular

New

63

37


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Analysis &Findings

Descriptive Statistics (Fig 6)

Interpretation: The number of valid cases for this set of variables is 75.

With 75 samples and 8 variables, the ratio of cases to variables is 9.37 to 1, which exceeds the

requirement for the ratio of cases to variables (5:1).

Mean Std. Deviation Analysis N

performance of previous funds4.01 .951 75

return on investment 4.39 1.025 75risk diversification 3.73 1.031 75cost of transaction 3.39 1.102 75flexibility 3.72 .994 75managed by professionalperson

3.87 1.107 75

affiliation of fund 3.59 1.028 75experience of fund manager

3.89 .894 75


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Steps for removal of variables:

1) GO to Anti image matrix table: Remove those variables which has MSA value less then0.5.

2) Since value for all the variables is >0.5 no variables leave the table.Anti Image Matrix (correlation) (Fig 7)

Anti Image Matrix (correlation)

performan

ce of

previous

funds

return on

investme

nt

risk

diversificati

on

cost of

transactio

n

flexibilit

y

managed

by

profession

al person

affiliatio

n of

fund

experien

ce of

fund

manager

performanceof previous

funds 0.62 -0.77 0.30 -0.35 -0.39 0.29 -0.15 -0.01

return on

investment -0.77 0.61 -0.36 0.30 0.27 -0.38 0.25 -0.22

risk

diversificati

on 0.30 -0.36 0.57 -0.69 -0.54 0.43 -0.31 -0.04

cost oftransaction -0.35 0.30 -0.69 0.57 0.27 -0.44 0.30 0.01

flexibility -0.39 0.27 -0.54 0.27 0.67 -0.52 0.03 0.22

managed by

professional

person 0.29 -0.38 0.43 -0.44 -0.52 0.62 -0.59 -0.12

affiliation of

fund -0.15 0.25 -0.31 0.30 0.03 -0.59 0.69 -0.29

experience

of fund

manager -0.01 -0.22 -0.04 0.01 0.22 -0.12 -0.29 0.84


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3) Now, see into the correlation table obtained after the above iterations. We find that thereare 24 correlation in the table which are >0.3, hence this satisfies the required condition ofhaving at least 1 variable > 0.3.

Correlation Matrix (Fig 8)

Correlation Matrix

performanceof previousfunds

return oninvestment

riskdiversification

cost oftransaction

flexibility

managedbyprofessional person

affiliation offund

experience of fundmanager

performanceof previousfunds 1.00 0.81 0.42 0.43 0.50 0.44 0.34 0.38

return on

investment 0.81 1.00 0.43 0.36 0.41 0.50 0.35 0.49riskdiversification 0.42 0.43 1.00 0.72 0.64 0.42 0.42 0.26

cost oftransaction 0.43 0.36 0.72 1.00 0.47 0.45 0.29 0.22

flexibility 0.50 0.41 0.64 0.47 1.00 0.67 0.55 0.22

managed byprofessionalperson 0.44 0.50 0.42 0.45 0.67 1.00 0.75 0.48

affiliation of

fund 0.34 0.35 0.42 0.29 0.55 0.75 1.00 0.51experienceof fundmanager 0.38 0.49 0.26 0.22 0.22 0.48 0.51 1.00

4) Now proceed to KMO table. Here we require overall MSA be >5, as we get 0.634 itsatisfies the above condition.Principal component analysis requires that the probability associated with Bartlett's Test of

Sphericity be less than the level of significance.


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KMO and Bartlett's Test (Fig 9)

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. 0.634

Bartlett's Test of Sphericity Approx. Chi-Square 360.081

df 28.000Sig. 0.000

5) The Bartlett's Test of Sphericity is a statistical test for overall significance of allcorrelations within a correlation matrix. The probability associated with the Bartlett test isp0.5

Communalities (Fig 10)

Communalities

Initial Extraction

performance of previousfunds 1 0.864

return on investment 1 0.897

risk diversification 1 0.810cost of transaction 1 0.755

flexibility 1 0.719

managed by professionalperson 1 0.819

affiliation of fund 1 0.860

experience of fundmanager 1 0.680

Extraction Method:Principal Component

Analysis.


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7) We will now look at Total variance explained.Total Variance Explained (Fig 11)

Total Variance Explained

Compo

nent

Initial

Eigenvalues

Extraction Sums of

Squared Loadings

Rotation Sums of

Squared Loadings

Tota

l

% of

Variance

Cumulativ

e % Total

% of

Variance

Cumulati

ve % Total

% of

Variance

Cumulati

ve %

1 4.26 53.22

53.2

2 4.26 53.22 53.22 2.29 28.67 28.67

2 1.13 14.10

67.3

2 1.13 14.10 67.32 2.17 27.08 55.76

3 1.02 12.74

80.0

5 1.02 12.74 80.05 1.94 24.30 80.05

4 0.64 8.0288.07

5 0.37 4.59

92.6

6

6 0.28 3.49

96.1

5

7 0.22 2.80

98.9

5

8 0.08 1.05

100.

0Extraction Method: Principal

Component Analysis.

Interpretation: The latent root criterion (same as Eigen valuesrepresents the amount ofvariance accounted for by a factor) for number of factors to extract would indicate thatthere were 3 components to be extracted for these variables, since there were 3 Eigenvalues greater than 1.0 (4.26, 1.13, 1.02). This is marked in orange.The cumulative proportion of variance criteria would also require 3 components to satisfy

the criterion of explaining 60% or more of the total variance in the original set of

variables. A 3 component solution would explain 80.05% of the total variance. This is

marked in blue.


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Scree plot (Fig 12)

Rotated Component Matrix(a) (Fig 13)

Component

1 2 3

performance of previous funds 0.34 0.14 0.85

return on investment 0.23 0.22 0.89

risk diversification 0.86 0.19 0.20

cost of transaction 0.84 0.08 0.22

flexibility 0.69 0.47 0.16

managed by professional person 0.38 0.79 0.22

affiliation of fund 0.25 0.89 0.09

experience of fund manager -0.09 0.65 0.50


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Interpretation: The variable in the revised table whose value is higher in component columns

are clubbed together in that respective column. Here in our case:

1) Component 1: Risk diversification, Cost of transaction, flexibility2) Component 2: Managed by professional, Affiliation of fund, Exp. Of fund Manager.3)

Component 3: Performance of previous funds, Return on investment.

Other findings :

1. The investors give more preference to regular income funds besides the considerations of 1)Diversified Equity 2) Tax Saving Schemes. Thus if the government encourages the investment inmutual funds in the current budget, then more people will be investing in the MFs for tax saving.However people are also not compliant to risk aversion. They are willing to invest in risky equity

funds.

2. Another significant finding of the project is that investors are lured by the returns MFs areshowing. However at the same time they also want to minimize their risk.

3. Investors desire or opt open-ended schemes than close-ended schemes. This means that theywant flexibility in the inflow and outflow of their funds.

4. The investment horizon, which is most liked by the investors, is 2-3 yrs.

5. The source of information the investors most rely is on advertisement or internet. However

they also require the detailed information, which they take from Financial Advisors. On othersources the investors are quite apprehensive.


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Conclusion

This paper seeks to identify factors that are considered important when selecting a mutual fund

by investors & financial advisors in an emerging market. Although India is a niche market byworld standards, the availability of funds for investment is expected to grow by double digits.

The findings of this study may prove useful to mutual funds that are already established in the

country.

The SPSS factor analysis was employed to generate the questionnaire and analyze its results. We

find that apart from the return & risk diversification past performance, and cost of transaction are

important factors in a mutual fund. Investors & financial advisors are looking for consistent

growth of funds over the long term. They also prefer managers who are experienced and

professionally qualified. As for funds, there is greater affinity for funds which are large and

linked to a government agency. The fund management company should also provide a variety offunds at lower transaction costs. It is a matter of time before the financial markets in emerging

economies like India are opened to foreign fund companies.

Our analysis results in clubbing of all the eight factors into three major components.Component 1 comprise of factors - Risk diversification, Cost of transaction, flexibility. TheComponent 2 comprise of managed by professional, Affiliation of fund & Experience of fundmanager. Performance of previous funds& Return on investment fall in Component 3. All thesefactors are important & must be taken care whenever the investment decision is to be made inMutual Funds.

We find that apart from the return & risk diversification past performance, and cost oftransaction are important factors in a mutual fund. Investors & financial advisors are looking forconsistent growth of funds over the long term. They also prefer managers who are experiencedand professionally qualified

Our findings show that customers in emerging markets look for consistent long-term growth. As

mutual funds in established markets also face the same challenge in their own domestic front,

similar investment strategies may be in order. Transaction costs may prove to be a different

challenge. The initial costs of setting up operations in emerging markets, understanding the local

political, social and economic environment may involve additional costs.


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RECOMMENDATIONS

There is lack of awareness among people about mutual funds so there should be moreadvertising and other promotional campaigns to make them aware.

People are more interested in investing in equity funds rather than debt funds because

companies are promoting more for equity funds. Companies should equally promote debtfunds also as the provide security to customers.

Companies should give knowledge to its customer about its computerized operations to

save their time and to make the operations easier.


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Limitations

Every Research survey has some limitations. Due to these limitations some error can take place

while analyzing the data. I have tried my level best to do justice to the assigned topic but still theproject has some limitations, mentioned as follows

Budgetary constraintsAs we have done first hand survey so gathering and processingdata was an expensive process. Due to limitations of the resources we used conveniencesampling technique.

Time constraintsThe time available to carry out the research was one month. So wehad to complete our study within this duration.

Reliability of the data The value of any research findings depend critically on the

accuracy of the data collected. Data quality can be compromised via a number ofpotential routes, e.g., leading questions, unrepresentative samples etc but we tried toensure that the data collected by us was accurate and samples were representative.


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References

[1] Addleman, S. (1962), `Òrthogonal main-effectplans for asymmetricalfactorialexperiments'', Technometrics, Vol. 4, February, pp. 21-46.

[2] Ang, J.S., Chen, C.R. and Lin, J.W. (1998), ``Mutualfund managers' efforts andperformance'', The Journal of Investing, winter, pp. 68-75. Asiaweek (2001), 4May.

[3] Auty, S. (1995), `Ùsing conjoint analysis in industrial marketing'', IndustrialMarketing Management, Vol. 24, pp. 191-206.

[4] Blake, C.R., Elton, E.J. and Gruber, M.J. (1993), ``the performance of bond mutualfunds'', Journal of Business, Vol. 66, pp. 371-403.

[5] Bogle, J.C. (1992), ``Selecting equity mutualfunds'', Journal of Portfolio Management,Vol. 18, winter, pp. 94-100.

[6] Bragge, J. (2001), ``Premeditation analysis of theenergy taxation dispute in Finland'',European Journal of Operational Research, Vol. 132 No. 1, pp. 1-16.

[7] Brown, B.J. and Goetzman, W. (1995),``Performance persistence'', Journal of finance,Vol. 50, pp. 679-98.

[8] Brown, B.J. and Goetzman, W. (1997), ``Mutualfund styles'', Journal of FinancialEconomics, Vol. 43, pp. 373-99.

[9] Brown, S.J., Goetzman, W., Ibbotson, R.G. andRoss, S. (1992), ``Survivorship bias inperformance studies'', Review of FinancialStudies, Vol. 5, pp. 553-80.

[10] Capon, N., Fitzsimons, G.J. and Weingarten, R.(1994), `Àffluent investors andmutual fund purchases'', International Journal of BankMarketing, Vol. 12 No. 3, pp. 17-25.

[11] Carhart, M.M. (1997), `Òn persistence in mutualfund performance'', Journal ofFinance, Vol. 52 March, pp. 57-82.[12] Carrol, J.D. and Green, P. (1995), ``Psychometricmethods in marketing research'',Journal of Marketing Research, Vol. 32, pp. 385-91.

[13] Cattin, P. and Wittink, R.R. (1982), ``Commercialuse of conjoint analysis: a survey'',Journal of Marketing, Vol. 46 No. 3, pp. 44-53.

[14] Chen, C.R., Lee, C.F., Rahman, S. and Chan, A.(1992), `À cross-sectional analysisof mutual fund's market timing and security selection


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skill'', Journal of Business Finance & Accounting, Vol. 19, pp. 659-75.

[15] Cook, W. and Hebner, K. (1993), ``A multi criteria approach to mutual fundselection'', Financial Services Review, Vol. 2 No. 1, pp. 1-20.

[16] Elton, E.J., Gruber, M.J. and Blake, C.R. (1996),``The persistence of risk-adjustedmutual fund performance'', Journal of Business, Vol. 69April, pp. 133-57.

[17] Elton, E.J., Gruber, M.J., Das, S. and Hlavka, M.(1993), ``Efficiency with costlyinformation: are interpretation of evidence from managed portfolios'', Review of FinancialStudies, Vol. 6, pp. 1-22.

[18] Goetzman, W.N. and Ibbotson, R.G. (1994), ``Dowinners repeat?'', Journal ofPortfolio Management, Vol. 20, pp. 9-18.


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Bibliography

1] www.Google.com

2] www.amfiindia.com

3] www.mutualfundsindia.com

4] www.hdfcfund.com

5]www.mutualfunds.headlinesindia.com

6]www.citemanhr.com
http://www.google.com/http://www.google.com/http://www.amfiindia.com/http://www.amfiindia.com/http://www.mutualfundsindia.com/http://www.mutualfundsindia.com/http://www.hdfcfund.com/http://www.hdfcfund.com/http://www.mutualfunds.headlinesindia.com/http://www.mutualfunds.headlinesindia.com/http://www.mutualfunds.headlinesindia.com/http://www.citemanhr.com/http://www.citemanhr.com/http://www.citemanhr.com/http://www.citemanhr.com/http://www.mutualfunds.headlinesindia.com/http://www.hdfcfund.com/http://www.mutualfundsindia.com/http://www.amfiindia.com/http://www.google.com/


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Annexure

1] Questionnaire used for survey

Survey

Dear Sir/Madam,

I am the students of L M Thapar School of Management, Thapar University Patiala. I am

conducting a research survey on Mutual Funds as a part of Dissertation course. Kindly extend

your cooperation in filling up this questionnaire.

1. What is your source of information while investing in mutual funds?InternetMagazineNewspaperFinancial AdvisorAdvertisements

2. Are you a regular or a new investor in mutual fund?

RegularNew

3. Your investment portfolio consists of ?

Real EstatePost office schemesMutual FundsSharesFixed Deposits


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4. What type of return you expect?

MonthlyQuarterlySemi annnualy

Annualy

5. Which Features attract you the most while choosing a specific Mutual Fund?

Factors you think are important for a you

as an investor

Strongly

agree

Agree Neutral disagree Strongly

disagree

Performance of previous funds

Return on Investment

Risk diversification

Cost of transaction

Flexibility

Managed by professional people

Affiliation of the fund

Experience of fund manager

6.Would you like share other factor which you feel is important & why? Please feel free to

express your views:

------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------


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Name______________________

Gender_____________________ Age_____________

Occupation__________________ Monthly Income___________

Thank you very much for your time and support.

Thesis( Mutual Fund)1

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