FACTORS AFFECTING INVESTORS PREFERENCE FOR MUTUAL FUNDS IN INDIA

By
1. Animesh Kumar Shukla
2. Sathishkumar.C

INTRODUCTION
The project contains the brief description of the mutual fund industry in general. It also includes the study and comparison of other investment products available in the market like Insurance plans, ULIP, Mutual Funds, Savings account, Provident funds, Postal savings and Fixed Deposits and Stocks available in the market.
A survey was conducted to gather primary data to judge the factors that influence investors before they invest in any of the investment tools and thus the first part of the paper scrutinizes the investor’s perception and analyzes the relation between the features of the products and the investors’ requirements. With this back ground an attempt has been made in this paper to categorize investors based on various demographic factors such as age, sex, income level and occupation. The second part of the paper deals exclusively in Mutual Funds. It is widely believed that MF is a retail product designed to target small investors, salaried people and others who are intimidated by the stock market but, nevertheless, like to reap the benefits of stock market investing. At the retail level, investors are unique and are a highly heterogeneous group. Hence, designing products that are customer tailored to the different needs is important. Currently (as on 23/3/2009) there are more than 2500 schemes with varied objectives and AMCs are competing against each other by launching new products or repositioning old ones. MF industry today is facing competition not only from within the industry but also from other financial products that provide many of the same economic functions as mutual funds but are not strictly MFs. Thus the second part of the paper attempts to study the factors influencing the fund/scheme election behavior of Retail Investors who invest in Mutual funds.


OBJECTIVE• To categorize investors as being inclined towards investment products based on certain characteristic such as sex, age, academic qualifications, marital status, occupation, annual income etc.
• In order to examine the issues raised above, this paper has the following objectives before it :
1) To understand the savings avenue preference among MF investors
2) To identify the features the investors look for in Mutual Fund products
3) To identify the scheme preference of investors
4) To identify the factors that influences the investor’s fund/scheme selection
5) To identify the information sources influencing the scheme selection decision.
• This paper shall also look into the brief history of mutual funds industry in
India; try to classify them according to the various schemes and products offered. It shall also provide a comparative analysis between different types of mutual funds in India and between mutual funds and other investment products.

COMPANY PROFILE
Mahindra and Mahindra Financial Services Limited is one of India’s leading non-banking finance companies focused on the rural and semi-urban sector providing finance for utility vehicles, tractors and cars with largest network of branches covering these areas. It is a subsidiary of M&M, a leading tractor and UV manufacturer with over 60 years experience in the Indian market. The Company was incorporated on 1st January, 1991 as Maxi Motors Financial Services Limited and received Certificate of Commencement of Business on 19th February, 1991. The name has been changed to Mahindra & Mahindra Financial Services Limited and Fresh Certificate of Incorporation was received on 3rd November, 1992.
Credit Rating:• Credit Rating Information Services Limited (CRISIL) has reviewed the performance of the Company and reaffirms FAA for Fixed Deposit program and AA for Long term Debt and P1+ for Short term Debt.
• Company has also been awarded “Ind AA+” rating by Duff & Phelps (DCR) for the Rs.50 crores Long Term Non- Convertible Debentures.
Products & Services
• It provides financial loans to tractors, utility vehicles, light commercial vehicles, cars, two wheelers, three-wheelers and used vehicles.
• Its services include Mutual Fund distributions and financial advisory services also.
• In May 2004, as a supplement to its lending business it started an insurance broking business through its wholly owned subsidiary, Mahindra
Insurance Brokers Limited (MIBL). Mahindra Finance has already started distributing insurance products in rural and semi urban India through its subsidiary Mahindra Insurance Brokers Limited.
• It has also recently commenced its mutual fund distribution business and are exploring opportunities of entering housing loans and personal loans in rural and semi urban markets.
• It believes that the growth of their interactive, people-driven business model depends on the building of strong, long-term personal relationships. This coupled with superior knowledge of rural markets, and the ability to tailor products, positions the company well to continue to meet rural and semi-urban credit needs and provide competitive, flexible and speedy lending services.

MAHINDRA FINANCE - FINSMART: INVESTMENT ADVISORY
SERVICES
• Now Mahindra finance has started its new venture named Mahindra Finance- FinSmart which is an investment advisory services provider.
• It provides financial planning solutions to customers by which they can get all those things which they want to achieve.
• And as in today’s scenario Mutual Funds is the best available investment option so it deals in MFs. Its planners tell people for how long and how much money they have to invest in MFs.
• In just over three years since its launch, it have strongly cemented its position as a leading player in industry based on its pioneering strategy i.e., “Where your Investment Matters and not its size”.

INVESTMENTS
Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings.
An investment can be described as perfect if it satisfies all the needs of Fll investors. So, the starting point in searching for the perfect investment would be to examine investor needs. If all those needs are met by the investment, then that investment can be termed the perfect investment. Most investors and advisors spend a great deal of time understanding the merits of the thousands of investments available in India. Little time, however, is spent understanding the needs of the investor and ensuring that the most appropriate investments are selected for him.

The Investment Needs of an Investor
By and large, most investors have eight common needs from their investments: 1. Security of Original Capital; 2. Wealth Accumulation; 3. Comfort Factor; 4. Tax Efficiency; 5. Life Cover; 6. Income; 7. Simplicity; 8. Ease of Withdrawal; 9. Communication.
• Security of original capital: The chance of losing some capital has been a primary need. This is perhaps the strongest need among investors in India, who have suffered regularly due to failures of the financial system.
• Wealth accumulation: This is largely a factor of investment performance, including both short-term performance of an investment and long-term performance of a portfolio. Wealth accumulation is the ultimate measure of the success of an investment decision.
• Comfort factor: This refers to the peace of mind associated with an investment. Avoiding discomfort is probably a greater need than receiving comfort. Reputation plays an important part in delivering the comfort factor.
• Tax efficiency: Legitimate reduction in the amount of tax payable is an important part of the Indian psyche. Every rupee saved in taxes goes towards wealth accumulation.
• Life Cover: Many investors look for investments that offer good return with adequate life cover to manage the situations in case of any eventualities.
• Income: This refers to money distributed at intervals by an investment, which are usually used by the investor for meeting regular expenses. Income needs tend to be fairly constant because they are related to lifestyle and are well understood by investors.
• Simplicity: Investment instruments are complex, but investors need to understand what is being done with their money. A planner should also deliver simplicity to investors.
• Ease of withdrawal: This refers to the ability to invest long term but withdraw funds when desired. This is strongly linked to a sense of ownership. It is normally triggered by a need to spend capital, change investments or cater to changes in other needs. Access to a long-term investment at short notice can only be had at a substantial cost.
• Communication: This refers to informing and educating investors about the purpose and progress of their investments. The need to communicate increases when investments are threatened.
• Security of original capital is more important when performance falls.
• Performance is more important when investments are performing well.
• Failures engender a desire for an increase in the comfort factor.
Perfect investment would have been achieved if all the above-mentioned needs had been met to satisfaction. But there is always a trade-off involved in making investments. As long as the investment strategy matches the needs of investor according to the priority assigned to them, he should be happy.
The Ideal Investment strategy should be a customized one for each investor depending on his risk-return profile, his satisfaction level, his income, and his expectations. Accurate planning gives accurate results. And for that there must be an efficient and trustworthy roadmap to achieve the ultimate goal of wealth maximization.


Choosing the Right Investment Options
After understanding the concept of investment, the investors would like to know how to go about the task of investment, how much to invest at any moment and when to buy or sell the securities, This depends on investment process as investment policy, investment analysis, valuation of securities, portfolio construction and portfolio evaluation and revision. Every investor tries to derive maximum economic advantage from his investment activity.
For evaluating an investment avenues are based upon the rate of return, risk and uncertainty, capital appreciation, marketability, tax advantage and convenience of investment. The following Table should give the clear picture relating to the investors’ investment decisions in various financial market instruments. The choice of the best investment options will depend on personal circumstances as well as general market conditions. For example, a good investment for a long-term retirement plan may not be a good investment for higher education expenses. In most cases, the right investment is a balance of three things: Liquidity, Safety and Return.

Investment Options in India
Fixed Deposits – They cover the fixed deposits of varied tenors offered by the commercial banks and other non-banking financial institutions. These are generally a low risk prepositions as the commercial banks are believed to return the amount due without default. By and large these FDs are the preferred choice of risk-averse Indian investors who rate safety of capital & ease of investment above all parameters. Largely, these investments earn a marginal rate of return of 6-8% per annum.
Government Bonds – The Central and State Governments raise money from the market through a variety of Small Saving Schemes like national saving certificates, Kisan Vikas Patra, Post Office Deposits, Provident Funds, etc. These schemes are risk free as the government does not default in payments. But the interest rates offered by them are in the range of 7% - 9%.

Money-back insurance - Insurance in India is mostly sold and bought as investment products. They are preferred because of their add-on benefits like financial life-cover, tax-savings and satisfactory returns. Even if one does not manage to save money and invest regularly in financial instruments, with insurance, the policyholder has no choice. If he does not pay his premiums on time, his insurance cover will lapse. Money-back Insurance schemes are used as investment avenues as they offer partial cash-back at certain intervals. This money can be utilized for children’s education, marriage, etc.
Endowment Insurance – These policies are term policies. Investors have to pay the premiums for a particular term, and at maturity the accrued bonus and other benefits are returned to the policyholder if he survives at maturity.
Bullion Market – Precious metals like gold and silver had been a safe heaven for Indian investors since ages. Besides jewellery these metals are used for investment purposes also. Since last 1 year, both Gold and Silver have highly appreciated in value both in the domestic as well as the international markets. In addition to its attributes as a store of value, the case for investing in gold revolves around the role it can play as a portfolio diversifier.
Stock Market – Indian stock markets particularly the BSE and the NSE, had been a preferred destination not only for the Indian investors but also for the Foreign investors.. Although Indian Markets had been through tough times due to various scams, but history shows that they recovered very fast. Many types of scrip had been value creators for the investors. People have earned fortunes from the stock markets, but there are people who have lost everything due to incorrect timings or selection of fundamentally weak companies.
Real Estate- Returns are almost guaranteed because property values are always on the rise due to a growing world population. Residential real estate is more than just an investment. There are more ways than ever before to profit from real estate investment.
Mutual Funds - There is a collection of investors in Mutual funds that have professional fund managers that invest in the stock market collectively on behalf of investors. Mutual funds offer a better route to investing in equities for lay investors. A mutual fund acts like a professional fund manager, investing the money and passing the returns to its investors.

Unit Linked Insurance Plans - ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same. In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component


BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back theunits to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of openended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.


Conclusion
Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.