A FACTORAL ANALYSIS OF MUTUAL FUND INVESTMENT AND INSURANCE FUND INVESTMENT : A COMPARATIVE STUDY

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1 A FACTORAL ANALYSIS OF MUTUAL FUND INVESTMENT AND INSURANCE FUND INVESTMENT : A COMPARATIVE STUDY 78 DR. B.N.PANDA Associate Dean, RCMA College, Bhubaneswar, ODISHA PROF.(DR.) J.K.PANDA HOD, Dept. of Business Administration, Utkal University, Vani Vihar, Bhubaneswar, ODISHA ABSTRACT The need insurance is to be assured within a lot of products and even compare them by paying the premium for any return. Again term insurance is coupled with some other investments. Insurance is something where one can live poorly so one can die richly and investment is something where one can build wealth. Both cannot go hand in hand and so invest wisely. But, the basics of investing money in Stocks, Bonds, Mutual funds, are simple and easy as one proceeds step by step. Any successful stock market investor is familiar with the basics of mutual find investing. But mostly investors are not even aware on their investments in mutual funds schemes, where their money have been invested. Investing in equity, mutual funds, IPO's, keeping an eye opportunities, watching the trends is not easy but one can learn the steps for successful investing. For the investor there is a need of regular update on stocks.for this study 100 samples from the private sector executives have been collected through a questionnaire and the study result reported that, the private sector executives mostly prefer to invest in insurance funds than stocks as mostly they are self conscious, well informed on investment. But in stocks, mostly they opined on maximum value on volatility, expectations, risk and return. It is interesting that most of the executives invest more freely on insurance funds of any company than the stock investment. KEY WORDS: investment, mutual fund, insurance, risk, return INTRODUCTION: In India, even today, the insurance penetration is only around six per cent of the total population, with 4.40 per cent in life and just 0.71 per cent in general insurance. The Insurance Regulatory and Development Authority s proposed draft on standard insurance products looks to deepen the market and enable inclusion. However, further clarity is needed on the guidelines for implementation. The main challenge is in developing and sustaining within a viable distribution network. In underpenetrated areas, distribution and premium collections costs escalate and making it difficult to offer the products at a nominal cost. One way this issue is tackled by building a robust online distribution and payment infrastructure, specialised to meet the needs of the rural population, along the lines of what e-choupal has successfully implemented. By investing in life insurance, almost anyone can transfer the financial risks of dying early, guaranteeing to family members who might otherwise be left in economic turmoil.

2 Today's life insurance policies, however, often come with features borrowed from the investment world, blending traditional insurance with attributes of a mutual fund account. Vehicles for Investing in Life Insurance Those who haven't purchased a policy may be familiar only with "term" life insurance, which covers the owner for a set period of time, say, until their child graduates from college. If the owner lives past that date, the plan expires and is worthless. But some life insurance policies are "cash value," which means the fees, or premium, initially are greater at the start of the policy than they would be in a term policy. The excess premium is then invested in a "separate account," either by the insurer or in an account controlled by the policy holder, building up cash value. Any investment gains can be used in a few ways: to increase the death benefit, to borrow against for any use or to keep the policy in effect if one stop paying monthly premiums. Policies that offer this investment feature come with significantly more complex terms, and are offered by salespeople who may earn a significant commission off one r initial premium. In variable life insurance policies, the cash value and benefits may actually decrease or go away completely depending upon the performance of the investments Flexibility of Investing in Life Insurance: The death benefit on a variable universal plan may be increased with a lump-sum payment, or borrowed against in the event of a pressing financial need like a medical emergency. The ability to skip payments is also considered an advantage. In addition, the investment account may be shifted to more conservative or aggressive options. Let us begin with a very simple question which is why a need for insurance. The answer lies in any combination of the following options: 1. Investment 2. Tax Benefit and 3. Insurance Benefit INVESTMENT People make a mistake of investing in insurance for variety of reasons. No matter what the investment objective is, it should not cost one much and returns should be in line with other investment options available at one s disposal. Tax Benefit The next category of people who invest in insurance is tax payers. Many fall into the trap of Insurance as an option to save tax. Some of questions are for them: 1. How much of the initial investment is actually invested? 2. Which funds the policy invests into to get returns they quote? If one have an insurance policy which invests in few selected category of funds why don t one select those funds on own and save? 79

3 Insurance Benefits The need insurance is to be assured within a lot of products and even compare them by paying the premium for any return. Again term insurance is coupled with some other investments. Insurance is something where one can live poorly so one can die richly and investment is something where one can build wealth. Both cannot go hand in hand and so invest wisely. INVESTING IN MUTUAL FUND STOCKS: The basics of investing money in Stocks, Bonds, Mutual funds, are simple and easy as one proceeds step by step. Any successful stock market investor is familiar with the basics of mutual find investing. But mostly investors are not even aware on their investments in mutual funds schemes, where their money have been invested. Investing in equity, mutual funds, IPO's, keeping an eye opportunities, watching the trends is not easy but one can learn the steps for successful investing. For the investor there is a need of regular update on stocks. Mutual fund invest Both the long term and short term investors can benefit from such type investments but there is a need of regular update on new investing schemes and the volatility in market investments. The investor use due diligence while investing in the hot stock tips. Indian stock market is quite mature. In fact India has the largest investor base in the world after the US and Japan. Investors can invest in shares, debentures, mutual funds and securities among other investment tools. Shares are traded in BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange). Trading can be done online or over the phone through the help of an intermediary. NRI's can invest in the Indian stock market under PIS (Portfolio Investment Scheme) which is regulated by RBI but NRI's are not allowed day trading that is to buy and sell a stock on the same day. In addition to above two main stock exchanges India have 21 recognised stock exchanges but the most active ones are the NSE and the BSE. NSE set up has a model exchange as a fully automated screen based system. BSE one of the oldest in the world accounts for the largest number of listed companies has also started a screen based trading system with the introduction of the Bombay online trading system. Regulations on the capital markets and the protection of investors interest is primarily the responsibility of the Securities and Exchange Board of India (SEBI) headquartered in Mumbai. consider three parameters while selecting a company. First is the strength of the business. How does the company make money and how sustainable is its competitive advantage? For instance, the competitive edge could be in the form of a substantial market share a strong brand, or a wide distribution network. 80

4 Risks of Investments Sometimes a mutual fund with a high yield has had a significant decline in price without a change in the company s dividend. For a stock to have a significant decline in market price, there usually is an accompanying steep decline in the company s business and resulting profits. These fundamental problems often make it impossible for the company to maintain its dividend payouts and the yield on investment will drop. If one spot a investment with a large yield in insurance, first it is needed to check its market price over the previous trends. So risk is that important factor to consider the pattern of investment. REVIEW OF LITRATURE Kumar (2001) investigated the effects of FII inflows on the Indian stock market represented by the Sensex using monthly data from January 1993 to December Kumar (2001) inferred that FII investments are more driven by Fundamentals and they do not respond to short-term changes or technical position of the market. In testing whether Net FII Investment (NFI) has any impact on Sensex, a regression of NFI was estimated on lagged values of the first difference of NFI, first difference of Sensex and one lagged value of the error correction term (the residual obtained by estimating the regression between NFI and Sensex). The study concluded that Sensex causes NFI. Similarly, regression with Sensex as dependent variable showed that one month lag of NFI is significant, meaning that there is causality from FII to Sensex. Stanley Morgan (2002) has examined that FIIs have played a very important role in building up India s forex reserves, which have enabled a host of economic reforms. Secondly, FIIs are now important investors in the country s economic growth despite sluggish domestic sentiment. The Morgan Stanley report notes that FII strongly influence short-term market movements during bear markets. However, the correlation between returns and flows reduces during bull markets as other market participants raise their involvement reducing the influence of FIIs. Research by Morgan Stanley shows that the correlation between foreign inflows and market returns is high during bear and weakens with strengthening equity prices due to increased participation by other players. Agarwal, Chakrabarti et al (2003) have found in their research that the equity return has a significant and positive impact on the FII. But given the huge volume of investments, foreign investors could play a role of market makers and book their profits, i.e., they can buy financial assets when the prices are declining thereby jacking-up the asset prices and sell when the asset prices are increasing. Hence, there is a possibility of bi-directional relationship between FII and the equity returns. Gurucharan Singh (2004) highlighted that the securities market in India has come a long way in terms of infrastructure, adoption of best international practices and introduction of competition. Today, there is a need to review stock exchanges and improve the liquidity 81

5 position of various scrips listed on them. A study conducted by the World Bank (1997) reports that stock market liquidity improved in those emerging economies that received higher foreign investments. P. Krishna Prasanna (2008) has examined the contribution of foreign institutional investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock exchange. Also examined is the relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial. Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment decision. Anand Bansal and J.S. Pasricha (2009) studied the impact of market opening to FIIs on Indian stock market behaviour. They empirically analyze the change of market return and volatility after the entry of FIIs to Indian capital market and found that while there is no significant change in the Indian stock market average returns; volatility is significantly reduced after India unlocked its stock market to foreign investors. In the next section we are discussing the data sources and methodology of the study. OBJECTIVES To find out the investment decision on insurance investment and mutual fund investment. To study the behavioral pattern of investors through samples HYPOTHESIS H0: There is more risk and more return on mutual fund investments than insurance investment. METHODOLOGY The primary data has been collected from 100 investors (private sector employees) and taken as samples from Bhubaneswar city only through a well defined questionnaire. The collected data have been interpreted through using the statistical packages. The t-test was applied for the study. STUDY RESULTS The study has been corroborated from the data collected from the samples (100) from private sector employees of Bhubaneswar city considering the factors on risk, return, knowledge level, Self-consciousness, investment amount, information from company/broker/agent front, volatility rate and expectation, These factors have been tested and compared through using t-test, standard deviation and standard error with mean value. These factors have been analysed in different tables reported below. 82

6 Table 1 T-Test: RISK AMOUNT N df Mean t Std. Std. Error Mean Deviation INSURANCE FUND STOCK Table 1 reveals that out of eight questions responded by the respondents of the Executives of Private Sector Employees, the mean response is almost same for all the questions on Risk bearing capacity of the executives, where as the standard deviation shows a negligible figure for both the investments,which indicates a lower fluctuation in risk coverage. The table also indicates the t values of the aggregate of eight questions asked to them, which is having a less coverage of risk on impact of the investment in insurance fund, which indicated that investors invest more in Insurance Fund than stocks in response as the risk bearings of individuals is less.so most of them want to invest in insurance fund rather than stock market. Table 2 T-Test: RETURN N df Mean t Std. Deviation Std. Error Mean INSURANCE FUND STOCK Table 2 reveals that out of eight questions responded by the Executives, the mean response is almost same for all the questions on Return, where as the standard deviation shows a meager value which indicates a less gap in the responses to all the eight questions. The table also indicates the t values of the aggregate of return factor on investment, it was more on the impact factor stock than insurance Fund.Most of them responded and agreed that return is more on stocks than insurance fund investment. Table 3 T-Test: KNOWLEDGE LEVEL N df Mean t Std. Deviation Std. Error Mean INSURANCE FUND STOCK Table 3 reveals that the question response on Knowledge Level and the respondents mean response is almost same for all the questions, where as the standard deviation 83

7 shows much less on both the investment and indicates a negligible gap in the cross responses. The table also indicates the t values on the questions asked to executives on knowledge level, the more is marked on the investment on stock than insurance fund. So investors /Executives are more aware and well adoptable to the stock investment than the other one. So more orientation is required for insurance fund. Table 4 T-Test: Self-Consciousness Groups N df Mean t Std. INSURANCE FUND Deviation Std. Error Mean STOCK Table 4 reveals that out of eight questions responded by the respondents of the Executives of private sector employees, the mean response is almost same for all the questions on Self-Consciousness, where as the standard deviation shows more on insurance fund and it indicates a more gap across the questions asked. The table also indicates the t values of the aggregate questions asked to them, which is indicated more for investment in insurance fund in response to Self Consciousness. So investors are more acquainted with the trend of insurance fund management of the companies time to time than stocks. Table 5 T-Test: INVESTMENT AMOUNT N df Mean t Std. Deviation Std. Error Mean INSURANCE FUND STOCK Table 5 reveals the mean response of all the questions on investment amount, where as the standard deviation indicated a mere fluctuation across the questions. Further, the table indicates the t values of the aggregate of eight questions asked to them, where more is marked in insurance fund than stocks. So Executives of the private sector invest more amount in insurance fund than investing in stocks. Table 6 T-Test: INFORMATION FROM COMPANY/BROKER/AGENT FRONT Groups N df Mean t Std. Deviation Std. Error Mean INSURANCE FUND STOCK

8 Table 6 reveals that the respondents Executives of private Sector, the mean response is almost same for all the questions on getting information, where as the standard deviation shows also negligible. The table also indicates the t values of the aggregate of questions asked to them, mostly investors get ample of information regarding their status from company though mobile, internet, s, broker calls and from agents of the companies than the information presently been provided on investment on stocks. This stock market sector investment lacks some sort of information. Table 7 T-Test: VOLATILITY RATE N df Mean t Std. Std. Error Mean Deviation INSURANCE FUND STOCK Table 7 reveals that out of eight questions responded by the respondents and the mean value of the questions asked in both the investment is almost same, where as the standard deviation shows also very negligible for both the investments. The table also indicates the t values of the aggregate of eight questions asked on rate of voltility, which is having a more impact on risk and return of the investment.the t-value is more on stock i.e. more volatility in the trend of return than investing in insurance fund. Table 8 T-Test: EXPECTATION N df Mean t Std. Deviation Std. Error Mean INSURANCE FUND STOCK (source: Own Compilation) Table 8 reveals that out of eight questions responded by the respondents on expectation, the mean response is almost same for all the questions on expectation, where as the standard deviation shows a very negligible value. The table also indicates the t values of the aggregate of eight questions asked to them, which is more on return from investment of stock than insurance funds. So the investors expect more on stocks even if in the same investment in insurance funds. It depends upon the psychology of the investors that investing ins tock obviously leads to any other investment, but from the risk and return point of view, they mostly prefer to invest in less risk investments even oif the return rate is lower than stocks. In conclusion, it is tested that, the private sector executives mostly prefer to invest in insurance funds than stocks as mostly they are self conscious, well informed on investment. But in stocks, mostly they opined on maximum value on volatility, 85

9 expectations, risk and return. It is interesting that most of the executives invest more freely on insurance funds of any company than the stock investment. risk expectation self-concious informations return knowledge investment - amount volatility rate Stock Stock Stock Insurance fund Insurance fund Insurance fund Stock Stock Figure: 1: Factor-wise Influence on Investment types Testing of Hypothesis: In response to factor wise investment(fig-1), more risk is involved with mutual fund stocks in response to their pattern of return compared to the investment in insurance funds. So the hypothesis is rejected. CONCLUSION This is a particularly an important valuation measure for investors seeking regular income. Investors who depend on income from their investments include retired persons as well as pension and mutual funds, which invest with the primary objective of maximizing the income return. These investors like to see a higher dividend yield. Typically higher dividend yields are associated with more stable and mature companies. In the absence of any capital gains, the dividend yield is the return on investment for a stock. An investment in knowledge pays the best interest Benjamin Franklin. When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study and analysis before making any investment decisions. FINDINGS AND SUGGESTIONS : The findings of the study has been interprets as : for stock option (mutual fund schemes), 86

10 Risk and Expectation Higher, where as Return, Knowledge level and rate of volatility are lower in each case. But incase of insurance fund investment, the investors are self conscious, get right information at right time along with the proper investment. Suggestions: Before making any investment decision, evaluate how it affects the current asset allocation plan. As time passes by, life stage changes with the needs as well as income change. So One should need to monitor and review investment periodically. It is required to ask questions like: Has my investment goal changed? Has my risk tolerance changed? How has the investment performed compared to the expectations and its peer group? Is there a need to change my decision? After all, we invest to create wealth for ourselves and achieve peace of mind. Let s not make our wrong investment decisions lose it for us. REFERENCES [ 1.] Ahmad, Khan Masood; Ashraf, Shahid and Ahmed, Shahid (2005), Foreign Institutional Investment Flows and Equity Returns in India, The IUP Journal of Applied Finance, March, pp [ 2.] Chakraborty tanupa (2007), Foreign Institutional Investment Flows and Indian Stock Market Returns. A Cause and Effect Relationship Study, Indian Accounting Review, Vol: 11, No: 1, June 2001, pp: [ 3.] Kumar Saji (2006), FIIs Vs. SENSEX: An Emerging Paradigm, Treasury Management, ICFAI University Press, February. [ 4.] Kumar, S. (2001). Does the Indian Stock Market Play to the tune of FII Investments? An Empirical Investigation. ICFAI Journal of Applied Finance 7 (3): [ 5.] Mazumdar, T. (2004). FII Inflows to India; Their effect on stock market liquidity. ICFAI Journal of Applied Finance 10 (7): [ 6.] Prasanna, P.K (2008), Foreign Institutional Investors: Investment preferences in India, JOAAG, Vol 3, No-3. [ 7.] Rai Kulwant & Bhanumurthy N R (2003) : Determinants of Foreign Institutional Investment in India, Journal: Journal of Institutional Investors. Vol 15. Publisher: Emerald Group Publishing Limited. [ 8.] Ravi Akula, (2011), An overview of foreign institutional investment in India, Indian journal of Commerce & Management studies, Vol: 2, Issue: 1, January 2011, pp: [ 9.] Samal, C. Kishore (1997), Emerging Equity Market in India: Role of Foreign [ 10.] Stanley Morgan (2002), FII s influence on Stock Market, Journal: Journal of impact of Institutional Investors on ism. Vol 17. Publisher: Emerald Group Publishing Limited. 87

11 [ 11.] Accounting Review, Vol: 11, No: 1, June 2001, pp: [ 12.] Applied Finance, March, pp [ 13.] Errunza, Vihang. (2001). "Foreign Portfolio Equity Investments, Financial Flows and Exchange Rate Regimes. [ 14.] [ 15.] Indian journal of Commerce & Management studies, Vol: 2, Issue: 1, January [ 16.] Institutional Investment Flows and Equity Returns in India, The IUP Journal of Institutional Investors, Economic and Political Weekly, Vol. 32, No. 42. [ 17.] Investment in India, Journal: Journal of Institutional Investors. Vol 15. [ 18.] Investments? An Empirical Investigation. ICFAI Journal of Applied Finance 7 [ 19.] Journal of Asian Research Consortium 46 [ 20.] Liberalization and Economic Development", Review of International Economics, [ 21.] liquidity. ICFAI Journal of Applied Finance 10 (7): Management, ICFAI University Press 88