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

[2007-09]

[LM THAPAR

SCHOOL OF

MANAGEMNT]

Table of content
TOPIC EXECUTIVE SUMMARY ABSTRACT LIST OF FIGURE ACKNOWLEDGEMENT CERTIFICATE OBJECTIVE INTRODUCTION LITERATURE REVIEW RESEARCH METHODOLOGY ANALYSIS & FINDINGS CONCLUSION RECOMMENDATIONS LIMITATIONS REFERENCES BIBLIOGRAPHY ANNEXURE PAGE NO 3 4 5 6 7 8 9 11 23 29 36 37 38 39 41 42

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EXECUTIVE SUMMARY

The project talks about the various factors considered by the customers while going for investment in mutual fund. The first This is few pages talk about the introduction and objectives of the study. 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, the characteristics of mutual funds that attract the investor and what an investor should consider for safe 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 emerging markets has been impressive. However, mutual fund research in emerging markets hardly exists. This paper intends to fill this gap. In particular, the paper surveys the relative importance of factors considered important in the selection of mutual funds by investors & financial advisors in emerging markets. Our survey focuses on Punjab (India) where the mutual industry started in the 1963 but only gained importance in the 1987 when there were players 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. The Component 2 comprise of managed by professional, Affiliation of fund & Experience of fund manager. Performance of previous funds& Return on investment fall in Component 3. All these factors are important & must be taken care whenever the investment decision is to be made in Mutual 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 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 24 25 25 26 26 27 28 29 29 30 31 32 32

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ACKNOWLEDGEMENT
I would like to express my sincere thanks to my Project Guide, Mrs. Yashika Aggarwal for her 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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Objective
Main 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 Mutual Fund

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 which research, 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 of funds that are under the purview of professional management is large and increasing. For instance, it has been estimated that mutual funds have been growing at an average annual rate of 14.4 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 Rainmaker Information reported that the Asian pension market[1] was US$ 3 trillion strong, which was about a quarter of the US pension fund market (PR Newswire, 2000). Emerging Asian economies like China, Indonesia, the Philippines, India and Malaysia are expected to grow by double digits annually and projected to reach US$ 12 trillion by the year 2030. This phenomenal growth in the mutual fund industry in these emerging markets has resulted in an increase in the number of investment companies offering a range of funds. Although the number of funds is small compared to established markets like the US, the growth is high. Faced with a range of mutual funds, how does one make choices? What are the factors that investors look for and is it possible to rank these choices? To what extent do these factors differ between emerging and established markets? This paper attempts to seek answers to these questions. Literature in the area of finance, particularly on mutual funds, provides a range of factors that contribute 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 paper we attempt to accomplish this by considering the views of financial advisors. This paper is also distinct 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 government involvement are a few factors which distinguish mutual funds in emerging markets from their counterparts in more established markets. The all too frequent boom and bust cycles that occur in the Asian and Latin American markets further point to the need for research to be done in these markets. While there is an extensive collection of literature on emerging markets, these mainly focus 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 on mutual funds that exist in these emerging markets. This could be due to the difficulties in portfolio evaluation in these markets (Hwang and Satchell, 1998). Nevertheless, the size of available funds in emerging markets and their growth prospect warrants in-depth study into these markets. The distinguishing factors mentioned above coupled with the innovative nature of new products adds to the complexity of the mutual fund industry 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 to identify the attributes which financial advisors along with the investors consider relatively important in a mutual fund. Through a survey of previous literature we identify factors that contribute 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 component of the capital market only in the late 1980s. The results of this study may prove useful to mutual funds in emerging markets like India as well as fund companies that are considering setting up funds in these markets. The remainder of the paper is organized as follows: the following pages review the literature presenting industry status in India & identifying the factors that are considered significant in selecting a mutual fund. Next few pages provide a brief overview of the mutual fund industry in India. The methodology used in data collection and the method of analysis is discussed in following 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 the existing 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 directly with the Mutual Fund for his/her redemptions and investments. Liquidity is the key feature here. 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 Active Debt Multi - Manager FoF Scheme, ICICI Prudential Very Cautious Plan and Birla Sun Life AAF - Aggressive Plan. Close-ended Mutual Fund Schemes in India Close -ended schemes are those which have a specified maturity period (which generally ranges from 2 - 15 years). At the time of initial public issue one can make direct investment in the scheme and can also get the benefit of buying and selling of the units. Due to demand and supply in the market plus the policy holders' expectations and various other market factors, the market price may vary from NAV (Net Asset Value). Some of the close-ended fund schemes in India are ING Vysya Dynamic Asset Allocation Fund and Kotak Dynamic Asset Allocation Scheme. Tax-saving Mutual fund Schemes in India Individuals, companies, partnership firms, and body corporate are some of the investing parties in the various Mutual Funds available in the market primarily to enjoy the benefits of tax saving. The Indian Mutual Funds are guided by principles of general contract framed by SEBI. It provides certain tax benefits to the fund holders. It is mandatory that tax benefits should 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 in India.

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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 inclined to 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 fund market. 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 the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual 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 Housing Development 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 Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. 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 largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited 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. as the 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 Rs 25.8 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 offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank 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 more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakh spread over 18 schemes. Tata Mutual Fund Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsor for Tata Mutual Fund is Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management 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 is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities. Unit Trust of India Mutual Fund UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsors of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life 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. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. 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 under which units are issued to the Public with a view to contribute to the capital market and to provide investors 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 Standard Chartered 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 global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail 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 Income and 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 in securities, investment management and credit services. Morgan Stanley Investment Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan 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 the needs 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 on December 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 Capital Management 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 office in Mumbai.
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 Benchmark Mutual Fund Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsor and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC. Can bank Mutual Fund Can bank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Can bank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai. Chola Mutual Fund Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC Limited. LIC Mutual Fund Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. The Company started its business on 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 that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 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 mutual funds 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 concentrating on 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 limited products. 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 mutual funds. 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 the design of the questionnaire used for data collection. No one factor has received as much attention in previous literature as past performance because it 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 of future performance. Some literature seems to find that there is only a slight positive relationship or 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 more conclusive about the relationship (Grinblatt and Titman, 1992; Hendricks et al., 1993). Goetzman and 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 most important 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 not guarantee future performance, a survey of 298 affluent investors found performance track record to be one of the four most important criteria for mutual fund selection (Capon et al., 1994). On the 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 funds despite their poor returns. To what extent the role of past performance influences the choice of funds, 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 et al. (1996) and Liljeblom and Loflund (2000), for example, explain that there is an inverse relationship between the expense ratio and mutual fund performance. Ang et al. (1998) explain that cost increases when fund managers follow an active trading style, as they would require a large research team. Golec (1996) in fact suggests that investors should avoid funds with a high expense ratio. Elton et al. (1993) and Ippolito (1989) find evidence that funds with a lower transaction cost outperform those with higher fees. Nevertheless, Chen et al. (1992) finds a positive relationship between performance and expense ratio. Although we expect the cost of transactions to be a determining factor, its relative importance to other determining factors is an issue well worth considering. Do larger mutual funds attract more investments? Shukla and van Inwegen (1995) answer in the affirmative because larger funds are able to employ more research staff who are then able to provide more information that would lead to better portfolio selection. This relationship is supported by other studies (Chen et al., 1992; Ang et al., 1998; Golec, 1996). Grinblatt and Titman (1989), however, found an inverse relationship between fund size and performance. A possible explanation for this finding is that the degree of performance pressure on the fund manager is so intense that investment style becomes aggressive resulting in frequent change in style and hence weaker performance. To what extentfund size influences the choice of mutual fund 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 several types of funds (or boutique funds) with differing objectives may be an attractive feature for the investor. The attraction is further enhanced when the investor is allowed to shift between funds without incurring a huge fee. In Malaysia, an investment management company handles about three 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. This is not surprising since the concept of mutual funds basically transfers the duty of stock selection to the fund managers. Shukla and Inwegen (1995) found that local fund managers were able to produce better returns compared to foreign managers. This is related to the accessibility of local managers to ``street research''. In the context of this paper, managers with greater experience should 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 superior skills, valuable information and greater willingness to assume risks. Golec (1996) related returns to 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 are young (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 does not 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 of mutual 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 of stocks held explain all the persistence in mutual fund performance. Finally, education does not seem to have a positive relationship to performance and managers holding an MBA produce weak results. Whether the characteristics and investment style of the fund manager is an influencing factor among financial advisors in emerging markets will be addressed 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) nominal level o The sample size must be greater than 50 (preferably 100) o The ratio of cases to variables must be 5 to 1 or larger o The correlation matrix for the variables must contain 2 or more correlations of 0.30 or greater o Variables with measures of sampling adequacy less than 0.50 must be removed o The overall measure of sampling adequacy is 0.50 or higher o The Bartlett test of sphericity is statistically significant. The first phase of a principal component analysis is devoted to verifying that we meet these requirements. 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 one component, 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, and o 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 the component, 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 or positive relationship. If there are two or more components in the component matrix, the pattern of loadings is based on the SPSS Rotated Component Matrix. If there is only one component in the solution, the Rotated 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 Gender category Male Female Age 21-23 24-27 28-30 Income/month (rs) 0-5000 15,000-20,000 21,000-30,000 30,000 & above Type of investor Regular New % 83 17 14.28 55.52 30.20 19 27 23 31 63 37

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Analysis &Findings
Descriptive Statistics (Fig 6) Mean performance of previous funds return on investment risk diversification cost of transaction flexibility managed by professional person affiliation of fund experience of fund manager 4.01 4.39 3.73 3.39 3.72 3.87 3.59 3.89 Std. Deviation .951 1.025 1.031 1.102 .994 1.107 1.028 .894 Analysis N 75 75 75 75 75 75 75 75

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).

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Steps for removal of variables: 1) GO to Anti image matrix table: Remove those variables which has MSA value less then 0.5. 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 managed experien ce of return on risk cost of by affiliatio ce of previous investme diversificati transactio flexibilit profession n of fund funds nt on n y al person fund manager performance of previous funds 0.62 return on investment -0.77 risk diversificati on 0.30 cost of transaction -0.35 flexibility -0.39

-0.77

0.30

-0.35

-0.39

0.29

-0.15

-0.01

0.61

-0.36

0.30

0.27

-0.38

0.25

-0.22

-0.36

0.57

-0.69

-0.54

0.43

-0.31

-0.04

0.30 0.27

-0.69 -0.54

0.57 0.27

0.27 0.67

-0.44 -0.52

0.30 0.03

0.01 0.22

managed by professional person 0.29 affiliation of fund -0.15 experience of fund manager -0.01

-0.38

0.43

-0.44

-0.52

0.62

-0.59

-0.12

0.25

-0.31

0.30

0.03

-0.59

0.69

-0.29

-0.22

-0.04

0.01

0.22

-0.12

-0.29

0.84
30

L M Thapar School of Management | Dissertation

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

Correlation Matrix (Fig 8) Correlation Matrix risk managed performance diversi cost of by affiliatio experienc of previous return on ficatio transactio flexibilit profession n of e of fund funds investment n n y al person fund manager performance of previous funds 1.00 return on investment 0.81 risk diversificati on 0.42 cost of transaction 0.43 flexibility 0.50 managed by professional person 0.44 affiliation of fund 0.34 experience of fund manager 0.38

0.81 1.00

0.42 0.43

0.43 0.36

0.50 0.41

0.44 0.50

0.34 0.35

0.38 0.49

0.43 0.36 0.41

1.00 0.72 0.64

0.72 1.00 0.47

0.64 0.47 1.00

0.42 0.45 0.67

0.42 0.29 0.55

0.26 0.22 0.22

0.50 0.35

0.42 0.42

0.45 0.29

0.67 0.55

1.00 0.75

0.75 1.00

0.48 0.51

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 it satisfies 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. Bartlett's Test of Sphericity

Approx. Chi-Square df Sig.

0.634 360.081 28.000 0.000

5) The Bartlett's Test of Sphericity is a statistical test for overall significance of all correlations within a correlation matrix. The probability associated with the Bartlett test is p<0.001, which satisfies this requirement. 6) Now, we will look into Communalities table. Remove the variable which has Extraction value < 0.5. Among them first the least one will leave the table. Here, No variable leaves the table, as the value for all the variable >0.5 Communalities (Fig 10) Communalities Initial performance of previous funds return on investment risk diversification cost of transaction flexibility managed by professional person affiliation of fund experience of fund manager Extraction Method: Principal Component Analysis.

Extraction 1 1 1 1 1 1 1 1 0.864 0.897 0.810 0.755 0.719 0.819 0.860 0.680

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7) We will now look at Total variance explained. Total Variance Explained (Fig 11) Total Variance Explained Compo Initial Extraction Sums of Rotation Sums of nent Eigenvalues Squared Loadings Squared Loadings Tota % of Cumulativ % of Cumulati % of Cumulati l Variance e % Total Variance ve % Total Variance ve % 53.2 1 4.26 53.22 2 4.26 53.22 53.22 2.29 28.67 28.67 67.3 2 1.13 14.10 2 1.13 14.10 67.32 2.17 27.08 55.76 80.0 3 1.02 12.74 5 1.02 12.74 80.05 1.94 24.30 80.05 88.0 4 0.64 8.02 7 92.6 5 0.37 4.59 6 96.1 6 0.28 3.49 5 98.9 7 0.22 2.80 5 100. 8 0.08 1.05 0 Extraction Method: Principal Component Analysis.

Interpretation: The latent root criterion (same as Eigen values represents the amount of variance accounted for by a factor) for number of factors to extract would indicate that there were 3 components to be extracted for these variables, since there were 3 Eigen values 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 performance of previous funds return on investment risk diversification cost of transaction flexibility managed by professional person affiliation of fund experience of fund manager 0.34 0.23 0.86 0.84 0.69 0.38 0.25 -0.09 2 0.14 0.22 0.19 0.08 0.47 0.79 0.89 0.65 3 0.85 0.89 0.20 0.22 0.16 0.22 0.09 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, flexibility 2) 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 in mutual 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 are showing. 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 they want 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 other sources 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 by world 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 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 analysis results in clubbing of all the eight factors into three major components. Component 1 comprise of factors - Risk diversification, Cost of transaction, flexibility. The Component 2 comprise of managed by professional, Affiliation of fund & Experience of fund manager. Performance of previous funds& Return on investment fall in Component 3. All these factors are important & must be taken care whenever the investment decision is to be made in Mutual 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 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 more advertising 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 debt funds 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 the project has some limitations, mentioned as follows Budgetary constraints As we have done first hand survey so gathering and processing data was an expensive process. Due to limitations of the resources we used convenience sampling technique. Time constraints The time available to carry out the research was one month. So we had 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 of potential routes, e.g., leading questions, unrepresentative samples etc but we tried to ensure that the data collected by us was accurate and samples were representative.

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References
[1] Addleman, S. (1962), ``Orthogonal main-effectplans factorialexperiments'', Technometrics, Vol. 4, February, pp. 21-46. for asymmetrical

[2] Ang, J.S., Chen, C.R. and Lin, J.W. (1998), ``Mutualfund managers' efforts and performance'', The Journal of Investing, winter, pp. 68-75. Asiaweek (2001), 4May. [3] Auty, S. (1995), ``Using conjoint analysis in industrial marketing'', Industrial Marketing Management, Vol. 24, pp. 191-206. [4] Blake, C.R., Elton, E.J. and Gruber, M.J. (1993), ``the performance of bond mutual funds'', 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 Financial Economics, Vol. 43, pp. 373-99. [9] Brown, S.J., Goetzman, W., Ibbotson, R.G. andRoss, S. (1992), ``Survivorship bias in performance studies'', Review of Financial Studies, Vol. 5, pp. 553-80. [10] Capon, N., Fitzsimons, G.J. and Weingarten, R.(1994), ``Affluent investors and mutual fund purchases'', International Journal of Bank Marketing, Vol. 12 No. 3, pp. 17-25. [11] Carhart, M.M. (1997), ``On persistence in mutualfund performance'', Journal of Finance, 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), ``A cross-sectional analysis of 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 fund selection'', 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-adjusted mutual fund performance'', Journal of Business, Vol. 69 April, pp. 133-57. [17] Elton, E.J., Gruber, M.J., Das, S. and Hlavka, M.(1993), ``Efficiency with costly information: are interpretation of evidence from managed portfolios'', Review of Financial Studies, Vol. 6, pp. 1-22. [18] Goetzman, W.N. and Ibbotson, R.G. (1994), ``Dowinners repeat?'', Journal of Portfolio 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

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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? Internet Magazine Newspaper Financial Advisor Advertisements

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

3. Your investment portfolio consists of ? Real Estate Post office schemes Mutual Funds Shares Fixed Deposits

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4. What type of return you expect? Monthly Quarterly Semi 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 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

Strongly agree

Agree

Neutral

disagree

Strongly disagree

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_____________________ Occupation__________________ Age_____________ Monthly Income___________

Thank you very much for your time and support.

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