MUTUAL FUND INVESTORS - INFLIBNET

[Pages:31]CHAPTER ? V

SEGMENTING MUTUAL FUND

INVESTORS

CHAPTER ? V

SEGMENTING MUTUAL FUND INVESTORS

In this chapter, the relationships among 4 sets of variables -information sources used for mutual fund purchase, selection criteria for deciding among alternative funds, mutual fund ownership ?characteristics and consumer demographic data is explored. An attempt is made to identify groups of investors who display intra group homage and inter-group heterogeneity regarding the use of information sources and selection criteria in their mutual fund investment decision. Such "market segments" might exhibit unique mutual fund investment behaviour and possess unique demographic characteristics. These market segments will provide insights valuable to mutual fund managers for developing marketing strategies for their funds among retail investors, thus improving the rate of mutual fund penetration among this segment.

Factor and cluster analysis identified 3 investor groups each on the basis of information sources used and the selection criteria employed. The three information source groups and the three selection criteria groups were formed from the same set of investors. It is expected that the two sets of groups will be interrelated such that membership of a particular information source group is non -randomly distributed

1

among the selection criteria groups and vice versa. Cross tabulation of the 3 information source groups and 3 selection criteria groups resulted in the formation of 9 combined groups. Chi square test and F test was used to explore the association of these combined groups to the fund ownership characteristics and investor demographics. This chapter is organized as follows:

 Identifying the importance attached to different information source and selection criteria.

Factor analysis to reduce these information source and selection criteria variable into confirmatory as well as explanatory variables.

Cluster analysis for grouping investors on the basis of information sources and selection criteria independently.

Cross tabulation sources and selection criteria clusters. Identifying the association between the combined groups and demographic

variables. Identifying the association between the combined group and fund ownership

characteristics Information Sources

In the purchase decision process, consumers receive information from different sources. The "Sources of information" in this context refers to a place or person from which one obtains information about mutual funds. Based on 'theory, past research, and judgment of the researcher, 12 information sources which could help investors choose a mutual fund are identified. These variables are qualitative in nature; therefore a Likert type scaling is used. The respondents were asked to rate the importance of the 12 specified variables on a 5 point scale ranging from extremely important to not at all important in order to find out the importance attached to them. The weighted average scores are studied to understand the degree of importance attached to these investment objectives: The weighted average scores (W AS) have been calculated by providing weights +2 ,+1 ,0, -1, and -2 to very important, (VI) important ( I ) , neutral (N ) not important (NI ) and not at all important (NNI ) in that

order. Table 5.1 presents the information sources and the frequencies along with the weighted score and ranks.

Of the 12 information sources surveyed the most important source overall was the recommendations in financial news papers, investment magazines, business news channels (WAS=0.891) followed by published performance rankings of independent research agencies (WAS=0.858), recommendations of friends/family business associates (WAS=0.833), recommendations of Financial advisors/ Distribution Companies (WAS=0.779) in that order. Advertisements in the print media (WAS=0.64) are also considered an important source. An important point to be noted here is that advertisement in sources other than the print media (W AS=0.045) comes eleventh in importance. Seminar Investor club activities (WAS=-0.766) are considered as least important among the 12 variables surveyed. The results of the survey are more or less consistent with the survey results of the study conducted by Noel Capon (1996). Selection criteria

Selection criteria refer to a set of product or service attributes that consumers consider when making purchase decisions among alternatives. The present study focuses on 24 attributes of Mutual Funds. An attempt is made to identify those attributes or characteristics that are important to an investor when making investment decisions. The respondents were asked to rate the importance of the 24 specified variables on a 5 point scale ranging from extremely important to not at all important in order to find out the importance attached to them. The weighted scores are studied to understand the degree of importance attached to these investment objectives. The weighted scores (WS) have been calculated by providing weights +2 ,+1 ,0, -1, and2 to very important, (VI) important ( I ) , neutral (N ) not important (NI ) and not at all

important (NNI ) in that order. Table 5.2 presents the selection criteria employed and the frequencies along with the weighted score and ranks.

Past performance of the fund/scheme was rated the most important selection criterion. Other important selection criteria include Funds reputation or brand name, Investment objective [growth, income balanced], Promptness in service. A deeper analysis of the results reveal that what prospective investors look into is the performance figures per se and not the factors that contributed to the performance like, for example the portfolio characteristics, expense ratio etc.,. Analyses also reveal that investors are concerned not only with the financial performance dimension but also with the service dimension. The CII-KPMG survey in May 2009 across top cities in India revealed that 24 percent of the survey respondents selected mutual funds on the basis of past performance and 22 percent of them for the brand name of the fund houses. These were the first and second most important reasons respectively among six reasons 3. Results of the present study also rates past performance and brand name of the fund houses as the top 2 selection criteria respectively. Surveys and experiments gauging investor views uniformly identify the importance of a fund's past returns. For example, Wilcox's experiment (2003)4 requiring investors to choose between hypothetical mutual funds found that a fund's returns over the past ten years and over the past year are the two most important factors to investors. Also, the survey by Capon, Fitzsimons, and Rice (1996)5 of households that invest in mutual funds found that a fund's "investment performance track record" is the most important factor in investors' choice of funds. Ramasamy and Yeung (2003)6 found that past performance was the most significant attribute considered by Malaysian investment advisors in selecting mutual funds. In addition, the ICI survey of fund investors (2006)7 found that 69 percent of respondents stated they reviewed a fund's "historical performance" before investing in a fund.

Information

Advertisement in print media. Advertisement in T.V, internet, radio

TABLE-5.1 INFORMATION SOURCES FOR MUTUAL FUND PURCHASE

VI

I

N

NI

NNI

No. % No % No. % No % No. %

125 20.6 284 46.9 88 14.5 72 11.9 37 6.1

27 4.5 192 31.7 206 34 143 23.6 38 6.3

Score

388 27

WAS Rank

0.64

5

0.045 11

--Web sites of AMFI, SEBI respective 83 13.7 218 36 183 30.2 84 13.9 38 6.3 224 0.370

8

mutual fund

Recommendations of friends/family 139 22.9 308 50.8 89 14.7 59 9.7 11 1.8 505 0.833

3

business Aassociates

Recommendations in financial news 138 22.8 319 52.6 109 18 25 4.1 15 2.5 540 0.891

1

papers, 1investment magazines, business

news channels

-Direct mail, / news letters, / fact sheets. 34 5.6 180 29.7 238 39.3 112 18.5 42 6.9 52 0.086 10

Mutual fund books

51 8.4 167 27.6 244 40.3 106 17.5 38 6.3 87 0.144

9

Published performance rankings of 137 22.6 309 51 105 17.3 47 7.8 8 1.3 520 0.858

2

independent 2research agencies

Recommendations of Financial advisors 109 18 327 54 111 18.3 45 7.4 14 2.3 472 0.779

4

Distribution Companies

Offer documents of respective mutual 94 15.5 234 38.6 180 29.7 78 12.9 20 3.3 304 0.502

7

fund schemes

Half-yearly Annual reports of mutual 97 16 223 36.8 206 34 55 9.1 25 4.1 312 0.515

6

fund

Seminar Investor club activities --

18 3 42 6.9 162 26.7 226 37.3 158 26.1 -464 -0.766 12

Source: Primary data

TABLE-5.2

SELECTION CRITERIA FOR MUTUAL FUND PURCHASE

Selection Criteria

VI

I

N

NI

NNI Wt

No. % No % No. % No % No. % Scores

Past performance 352 58.1 249 41.1 4 0.7 0 0 1 0.2 952

Fund reputation /brand

269 44.4 318 52.5 14 2.3 5 0.8 0 0 846

No. of schemes in 34 5.6 191 31.5 253 41.7 108 17.8 20 3.3

73

that fund

Investment objective

194 32 383 63.2 23 3.8 6 1 0 0 759

Scheme's expense ratio

63 10.4 270 44.6 198 32.7 64 10.6 11 1.8 257

Fund manager's reputation

126 20.8 266 43.9 179 29.5 31 5.1 4 0.7 452

Rating by rating 108 17.8 334 55.1 125 20.6 31 5.1 8 1.3 480 agency

Innovativeness of 62 10.2 272 44.9 218 36 47 7.8 7 1.2 295 scheme

Entry and exit load

133 21.9 323 53.3 112 18.5 34 5.6 4 0.7 517

Tax benefits

156 25.7 303 50 107 17.7 32 5.3 8 1.3 453

NAV/Purchase prince

183 30.2 312 51.5 69 11.4 26 4.3 16 2.6 610

Assets under management

66 10.9 278 45.9 228 37.6 26 4.3 8 1.3 350

Collaboration with Int.Funds

49 8.1 234 38.6 233 38.4 71 11.7 19 3.1 171

Portfolio characteristics/

39 6.4 232 38.3 298 49.2 31 5.1 6 1 242

Withdrawal facilities

168 27.7 261 59.6 54 8.9 16 2.6 7 1.2 658

Holding another schemes of the same fund

43 7.1 242 39.9 230 38 36 12.5 15 2.5 161

Responsiveness of enquiries

127 21 332 54.8 110 18.2 31 5.1 6 1 518

Minimum investment

104 17.2 300 49.5 129 21.3 60 9.9 13 2.1 375

Additional features like phone, service, SIP,

86 14.2 272 44.9 174 28.7 56 9.2 18 3 314

Distribution net work

104 17.2 285 47 154 25.4 53 8.7 10 1.7 377

Promptness in service

198 32.7 254 58.4 42 6.9 7 1.8 1 0.2 727

Investor right adherence

160 26.4 357 58.9 70 11.6 18 3 1 0.2 640

Grievance redressal

188 31 332 54.8 70 11.6 14 2.3 2 0.3 678

Lock in period.

182 30 314 51.8 80 13.2 26 4.3 4 0.7 622

Source: Primary data

Rank 1 2 24 3 20 14 12 19 11 13 9 17 22 21 6 23

10 16 18

15 4 7 5 8

While many investors tend to choose mutual funds largely on the basis of past performance, empirical evidence on the historical relationship between returns in successive years is mixed. Siri and Tufano (1998)8, and Ippolito (1992)9 report that investors generally invest in positive performance funds and divest from poor performing fund. However Fabian Niebling(2009)lO show that the majority of individual investors do not use historical performance as their decision criterion the dominant factor for this being lack of investor sophistication. Capon et al. (1996)11 asked mutual fund investors to rate the importance of nine factors in choosing a particular mutual fund. The ratings could range from one (not at all important) to five (extremely important). The respondents gave management fees an average rating of only 2.28, fifth among the nine factors. The present study rated schemes expense ratio twentieth among twenty four factors surveyed presenting almost a similar picture that schemes expenses are among the least considered while choosing a mutual fund scheme. Factor analysis for Information Sources:

Factor Analysis by Principal Component Method is applied to reduce the 12

variables into confirmatory as well as explanatory factors. In order to reduce the

variables systematically KMO and Bartlett's tests are applied to test the sampling

adequacy for data reduction process as well as formation of a bell shaped normal

distribution for primary data. Table 5.3 presents KMO and Bartlett's tests.

TABLE-5.3

KMO AND BARTLETT'S TEST INFORMATION SOURCES

Kaiser-Meyer-Olkin Measure of Sampling Adequacy

0.754

Bartlett's Test of Sphericity

Approx. Chi -Square

1327.946

Degree of Freedom

66

Significance

0.000

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