A STUDY OF CONSUMER BEHAVIOR TOWARDS MUTUAL FUNDS WITH SPECIAL REFERENCE TO ICICI PRUDENTIAL MUTUAL FUNDS, VIJAYAWADA

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2 Int. J. Mgmt Res. & Bus. Strat R Padmaja, 2013 ISSN X Vol. 2, No. 2, April IJMRBS. All Rights Reserved A STUDY OF CONSUMER BEHAVIOR TOWARDS MUTUAL FUNDS WITH SPECIAL REFERENCE TO ICICI PRUDENTIAL MUTUAL FUNDS, VIJAYAWADA R Padmaja 1* *Corresponding Author: R Padmaja, padmajapeddireddi@rediffmail.com A mutual fund is a type of professionally-managed collective investment vehicle that pools money from many investors to purchase securities. As there is no legal definition of mutual fund, the term is frequently applied only to those collective investments that are regulated, available to the general public and open-ended in nature. Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. Today they play an important role in household finances. So the present study aims at consumer behavior towards mutual funds with special reference to ICICI Prudential Mutual Funds Limited, Vijayawada. Data was collected through primary and secondary sources. Primary data was collected through structured questionnaire. Convenience sampling method was used to collect the data and entire study was conducted in Vijayawada City. The study explains about investors awareness towards mutual funds, investor perceptions, their preferences and the extent of satisfaction towards mutual funds. Some suggestions were also made to increase the awareness towards mutual funds and measures to select appropriate mutual funds to maximize the returns. Keywords: Mutual funds, Customer perception, Consumer behavior INTRODUCTION A mutual fund is a type of professionally-managed collective investment vehicle that pools money from many investors to purchase securities. As there is no legal definition of mutual fund, the term is frequently applied only to those collective investments that are regulated, available to the general public and open-ended in nature. Unit Trust of India is the first mutual fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64. In India, mutual funds must be registered with Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament. Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. Today they play an important role in household finances. The first mutual 1 Department of Business Management, Krishna University, Machilipatnam , Krishna District, AP. 30

3 funds were established in Europe in The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in Mutual funds were introduced into the United States in the 1890s. They became popular during the 1920s. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio. The first open-end mutual fund with redeemable shares was established on March 21, MUTUAL FUNDS IN INDIA In India mutual funds are divided in to balanced funds, Income fund, Growth funds, Sector funds, etc. Equity funds mainly consist of common shares and stocks of companies listed in the stock exchanges. They are considered risky but are likely to give higher return in the longer run. Fixed income funds: Also known as low risk funds, these funds mainly invest in government and corporate securities (debentures) with fixed amount of returns, which are generally moderate. Balanced funds are basically a combination of both bonds and stocks, which involves moderate to little risk. Hybrid funds include other investment classes in their portfolio like gold apart from equity and debt. Since April 2011, the mutual fund industry clocked a 3% growth in its average Assets Under Management (AUM) to touch Rs lakh cr in August (month-on-month) on the back of higher inflows into liquid and income funds. (Crisil Report-September 2012). Mutual funds have advantages compared to direct investing in individual securities. These include increased diversification, daily liquidity, professional investment management, ability to participate in investments that may be available only to larger investors, service and convenience, government oversight and ease of comparison. Mutual funds have disadvantages as well, which include fees, less control over timing of recognition of gains, less predictable income and no opportunity to customize. Top 10 mutual funds in India are ICICI Prudential Top 100, Escorts Income Plan- Gro, Reliance RSF Balanced, DSP Black Rock MIP Fund, Escorts Liquid Plan Gr, Reliance Equity Linked S, MOSt Shares NASDAQ 100, Baroda Pioneer Gilt Fund, IDFC Nifty Fund Growth. SEBI Guidelines Pertaining to Mutual Funds: SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds: They are MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. The net worth of the AMCs should be at least Rs. 5 cr. AMCs and Trustees of a MF should be two separate and distinct legal entities. The AMC or any of its companies cannot act as managers for any other fund. AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. All MF schemes should be registered with SEBI. MFs should distribute minimum of 90% of their profits among the investors. There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds. NEED FOR STUDY For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because mutual funds provide 31

4 the benefit of cheap access to expensive stocks. Mutual funds diversify the risk of the investor by investing in a basket of assets. A team of professional fund managers manages them with in-depth research inputs from investment analysts. Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access. So the present study has taken up to know the extent of awareness about mutual funds and to analyze the investors perception towards mutual funds. OBJECTIVES 1. To know about the extent of awareness about mutual funds with special reference to ICICI Prudential Mutual Funds, Vijayawada. 2. To know about the preferences of investors towards mutual funds with special reference to ICICI Prudential Mutual Funds, Vijayawada. 3. To know about the perceptions of investors towards mutual funds with special reference to ICICI Prudential Mutual Funds, Vijayawada. 4. To know about the extent of satisfaction of investors towards mutual funds with special reference to ICICI Prudential Mutual Funds, Vijayawada. METHODOLOGY Research Design selected for this research is descriptive design and the Universe is Vijayawada City. Data was collected in two ways, i.e., Primary data and Secondary data. The data collection method used for collection of primary data was survey method and the data collection instrument used is structured questionnaire. The sampling technique used is non probability convenience sampling. Sample size is 100 respondents and sampling units include businessmen, Government servants, professional and retired Individuals. The secondary data was collected through journals, magazines, books, company manuals, websites, etc. LIMITATIONS 1. Sample size was limited to 100 because of limited time which is small to represent the whole population. 2. The research was limited to Vijayawada city only and if the same research would have been carried in another city, the results may vary. 3. Sometimes the respondents because of their business didn t able to concentrate while filling up the questions. However the researcher tried her level best to overcome the limitation by explaining the importance of research. DATA ANALYSIS AND INTERPRETATION From Table 1, it is observed that 25% of all the respondents fall under income group of less than 1,00,000, 65% of our total respondents fall under income group of 1,00,001-2,00,000 and 10% of our respondents fall under income group of 2,00,001-3,00,000. From Table 2, it is observed that out of the total respondents, 76 respondents are aware of mutual funds and 24 respondents are not aware of mutual funds. From Table 3, it is observed that 68% of the respondents invest in mutual fund and 32% of total respondents were not invested in any mutual fund. 32

5 Table 1: Classification of Respondents Based on Income S. No. Income (In rupees)/month Number of Respondents Percentage 1. Less than 1,00,000/ ,00,001/-to 2,00,000/ ,00,001/- to 3,00,000/ ,00,001/- and Above Total 100 Table 2: Classification of Mutual Funds Basing on the Awareness Towards Mutual Funds S. No. Aware/Not Aware Number of Respondents Percentage 1. Yes No Table 3: Classification of Respondents Basing on Whether they Invest/or Not Invest in Mutual Funds S. No. Investment Number of Respondents Percentage 1. Yes No From Table 4, it is observed that 89% of the respondents are interested in getting good deduction from tax and 11% of respondents are not interested in getting deduction from tax. From Table 5, it is observed that 76% of all the respondents know mutual fund is a good instrument of tax saving and 24% of total respondents did not that mutual fund is a good instrument of tax saving. From Table 6, it is observed that majority of the responders prefer mutual funds as an investment rather than other type of investment. From the Table 7, it is observed that 20% of the respondents invest for the purpose of high return, 18% invest for the purpose of tax benefit, 45% invest for the purpose of saving, 10% invest for the purpose of wealth creation and 7% invest for the purpose of risk diversification. From the Table 8, it is observed that 3% of the respondents get less than 5%, 65% of the respondents get between 5%-10% returns. So majority of the respondents get 5-10% returns. From the Table 9, it is observed that 65% of all the respondents prefer investment in equity fund, 11% of all the respondents prefer investment in Debt fund, and remaining 24% of the respondents prefer investment in balanced fund. So it can be concluded that majority of the respondents are interested to invest in equity funds. From Table 10, it is observed that SBI magnum 33

6 Table 4: Classification of Respondents Basing on Their Interest to get Deduction from Tax S. No. Interest Number of Respondents Percentage 1. Yes No Table 5: Respondents Classification Basing on Whether They Know/Not Know That Mutual Fund is a Good Instrument of Tax Saving S. No. Investment Number of Respondents Percentage 1. Yes No Table 6: Classification of the Respondents Basing on the Type of the Investments They Hold at Present S. No. Investment Number of Respondents Percentage 1. Equity market Mutual fund Government bond Real estate Bank FD Post office Insurance Total Note: Respondent invest in more than one instrument of saving. Table 7: Classification of Respondents Basing on the Purpose they Invested in Mutual Funds S. No. Investment Purpose Number of Respondents Percentage 1. High return Tax benefit Saving Wealth creation Risk diversification

7 Table 8: Classification of the Respondents Basing on the Returns Receive From all their Investments S. No. Investment Returns (%) Number of respondents Percentage 1. < > Table 9: Classification of the Respondents Basing on Their Preference Towards Different Types Of Mutual Funds S. No. Investment preference Number of respondents Percentage 1. Equity fund Debt fund Balanced fund tax gain scheme gained more points when compared with other plans. From the Table 11, it is observed that majority of the respondents preferred to invest in three year period mutual funds. It means majority of the respondents preferred SBI magnum tax gain scheme. From the Table 12, it is observed that wealth maximization benefit is most preferred benefit by the investors. From Table 13, it is observed that investor prefer ICICI tax plan. Table 10: Preference for the SIP Tax Plan of Various Companies (Where 1 Point is For Most Preferred and 6 For Least Preferred) S. No. Investment in Various Company Tax Plan Number of Points Percentage 1. SBI magnum tax gain scheme Kotak tax saver ICICI prudential tax plan Fidelity tax advantage fund Reliance tax saver fund HDFC tax saver Total

8 Table 11: Preference for the Period of Investment of Systematic Investment Plan (SIP) for your tax Saving (Where 1 is for Most Preferred and 4 is for Least Preferred) S. No. Investment time period Number of points Percentage 1. Three year Five year Six year Seven year Total Table 12: Preference for Benefits Offered Among Various AMC Tax Plan of Mutual Funds (Where 1 is for Most Preferred and 5 is Least Preferred) S. No. Investment Benefits Number of Points Percentage 1. Flexibility to investors Capital appreciation Tax free return Wealth maximization Small amount of investment Total From the Table 14, it is observed that the people in the age group of years are more open to mutual fund holding and equity market. The share of mutual fund shows a decreasing trend as the age increases. It is observed that in the latter age groups, Life Insurance policies and Government Securities and Bonds have an increasingly preferred. Overall, Mutual Fund, Stock Market, Bank Fixed Deposits and Life Insurance policies are the most preferred holdings amongst all age groups in the service category From the Table 15, it is observed that maximum investment is made in age group investors. Also they are holding a diversified portfolio which includes PPF, Postal Schemes, Fixed Deposit, as well as Equity Schemes (Mut-ual fund, Stock Market). Age group holds investments in Equity Market, Bank FD, and some also hold their Money in Real Estate. Business class people focus more on high return with moderate security of return. So majority of their investment is made in Mutual Investment. Also comparing the options the maximum is in Mutual Fund then come Equity Market and at the third Position there are three types of holding with similar preferences. They are Post Office, Real Estate and Bank FD. From the Table 16, it is observed that people in the age category of and years have a certain preference for equity holdings, mutual fund, real estate. However these people are very conscious for the assured return and security. This category mostly consisting of retired people and housewives and from Table 17, it has been observed that preference for mutual fund is low in this category. However Bank Fixed Depo- 36

9 Table 13: Classification of Respondents Basing on the Preference for Tax Saving Plan of ICICI Prudential Mutual Fund S. No. Investment Preference Number of Respondents Percentage 1. Most preferred Favorably preferred Preferred Least preferred Not preferred Table 14: Age Wise Classification of Respondents Basing on Their Preference of Investment S. No. Service Class > 65 Total 1. Equity Market Mutual Fund Govt. Bonds Real Estate Bank F.D Post office Life Ins Total Table 15: Age Wise Break up of Business Class Respondents S. No. Business Class > 65 Total 1 Equity Market Mutual Fund Govt. Bonds Real Estate Bank F.D Post office Life Ins Total

10 Table 16: Age Wise Break up of Professional Class Respondents S. No. Professional > 65 Total 1. Equity Market Mutual Fund Govt. Bonds Real Estate Bank F.D Post office Life Ins Total Table 17: Age Wise Break Up of Retired Class Respondents S. No. Retired >65 Total 1. Equity Market Mutual Fund Govt. Bonds Real Estate Bank F.D Post office Life Ins Total sits, Post Schemes, Life Insurance have the greatest preference amongst people in this category. From the Table 18, it is observed that investment in mutual funds is by all age groups but investors between the age of and years mostly prefer to invest in Mutual Fund. From the Table 19, it is observed that investor whose income is between /- to /- highly prefer to invest in tax saving plan of Mutual Fund. Table 18: Age Wise Break Up of Investment in Mutual Funds S. No. Attribute > 65 Total 1. Yes No Total

11 Table 19: Income Wise Break Up Of Investment S. No. >100, and More Total 1. Yes No Total Table 20: Occupation Wise Break Up For Investment in Different Funds S. No. Service Class Business Class Professional Retired Total 1. Equity Fund Debt Fund Balanced Fund Total Table 21: Occupation Wise Preference for ICICI Mutual Funds S. No. Service Class Business Class Professional Retired Total 1. Most Preferred Favorably Preferred Preferred Least Preferred Not Preferred Total From the Table 20, it is observed that investors in business class and professionals like to invest in equity fund and balanced fund. From the Table 21, it is observed that investors of service class, business and professional like to invest in ICICI Tax saving plan, while retired class are less likely to invest. SUGGESTIONS Even though the mutual funds are good source of income, the people lack awareness and information towards mutual funds. So the following suggestions were made in order to increase the awareness among the people especially the rural people. 1. Increase awareness among investors: Many investors are still restricting their choices to the non-governmental options like gold and fixed deposits even the market is flooded with countless investment opportunities. This is because of lack of awareness about mutual funds which makes many investors restrict their choice to traditional options like gold and fixed deposits. So awareness relating to 39

12 mutual funds must be increased among the investors to encourage them to invest in mutual funds. 2. Provide complete information relating to mutual funds: Even among the investors who invest in mutual funds are unclear about how they function and how to manage them. So proper information must be provided to the investors in order to increase the loyalty among the investors. 3. Investors fee must be reduced by reducing paper work: Investors fee includes management fee, distribution fee, distribution fee, and administrative costs, etc., which are generally deducted from the asset value. This can be possible if the investment is made without agent and if the paper work is reduced. 4. Better commission should be paid to Asset Management Companies: From the past 4-5 years the trust of investors on mutual funds is reduced because of the poor performance of mutual funds in these years. So if better commission is paid to Asset Management Companies which are highly knowledgeable and by motivating them we can improve the distribution system of mutual funds. 5. Subsidized Investments to rural investors: Because of the issue of commercial viability, mutual funds were limited to major cities only. So if mutual funds are offered to rural and semi urban investors at subsidized rates like agricultural loans, the demand for mutual funds increases in rural and semi urban areas also. 6. Advertising campaigns must be conducted in rural areas to increase awareness among rural investors. CONCLUSION Mutual funds are good source of returns for majority of households and it is particularly useful for the people who are at the age of retirement. However, average investors are still restricting their choices to conventional options like gold and fixed deposits when the market is flooded with countless investment opportunities, with mutual funds. This is because of lack of information about how mutual funds work, which makes many investors hesitant towards mutual fund investments. In fact, many a times, people investing in mutual funds too are unclear about how they function and how one can manage them. So the organizations which are offering mutual funds have to provide complete information to the prospective investors relating to mutual funds. The government also has to take some measures to encourage people to invest in mutual funds even though it is offering schemes like Rajiv Gandhi Equity Savings Scheme to the investors. It is believed that some of these measures could lift the morale of the mutual fund industry which has been crippled for the last three years. REFERENCES 1. Investment Company Institute (2011), as cited in Ignites, December Fink Matthew P (2008), The Rise of Mutual Funds, Oxford University Press, p Pozen Robert and Hamacher Theresa (2011), The Fund Industry: How Your Money is Managed, John Wiley & Sons. pp Pozen and Hamacher (2011), pp Pozen and Hamacher (2011), pp

13 6. Rouwenhorst K Geert (2004), The Origins of Mutual Funds, Yale ICF Working Paper No , December 12, 2004), p Investment Company Fact Book, Investment Company Institute. Retrieved

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