THE STUDY OF INVESTOR S PERCEPTION TOWARDS DERIVATIVES AS AN INVESTMENT AVENUE Dr. Babaraju. K. Bhatt Principal Shri Manilal Kadakia College of Management & Computer Studies Ankleshwar, Gujarat State, INDIA Ph. D Supervisor - Pacific Academy of Higher Education & Research, Udaipur Ms Apurva A Chauhan Assistant Professor Naran Lala School of Industrial Management & Computer Science Navsari, Gujarat State, INDIA Research Scholar - Pacific Academy of Higher Education & Research, Udaipur ABSTRACT: Innovation of derivatives have redefined and revolutionized the landscape of financial industry across the world and derivatives have earned a well deserved and extremely significant place among all the financial products. Derivatives are risk management tool that help in effective management of risk by various stakeholders. Derivatives provide an opportunity to transfer risk, from the one who wish to avoid it; to one, who wish to accept it. India s experience with the launch of equity derivatives market has been extremely encouraging and successful. The derivatives turnover on the NSE has surpassed the equity market turnover. The present study focuses on the perception of investors towards derivatives as an investment avenue. The study is based on the primary data collected through questionnaire from the retail investors. The result of present study states that investors considers many factors such as guidance from financial advisor and broker hedging fund, risk control, their own knowledge regarding financial product, and high volatility in the stock market etc while taking decision to invest in derivatives. Key Words: Stock Market, Investor s Perception, Derivatives, Investment Avenue. Volume 1, Issue 3, December 2014 www.kijrm.com Management 127
INTRODUCTION: In dictionary term derivative means something which is derived from another source. Therefore, derivative is not primary, and hence not independent. It depends upon the primary source from which it is derived. In financial terms, derivative is a product whose value is derived from the value of one or more basic variables. These basic variable are called bases, which may be value of underlying asset, a reference rate etc. the underlying asset can be equity, foreign exchange, commodity or any asset. Derivatives are contract for future delivery of assets at price agreed at the time of the contract. The quantity and quality of the asset is specified in the contract. The buyer of the asset will make the cash payment at the time of delivery. The financial derivatives, derivatives for future delivery of stocks, debt instruments and foreign currencies, came into spotlight in post 1970 period due to the introduction of floating exchange rates. Since their emergence, financial derivatives have become very popular and now they account for about two-third of total transaction in derivative products. NEED FOR STUDY: While derivatives can be used to help manage risks involved in investments, they also have risks of their own. Various risks such as market risk, liquidity risk, credit risk, hedging risk etc are associated with derivatives. Derivatives exhibit price sensitivity to change in market condition, such as fluctuation in interest rates or a currency exchange rate which is called as market risk. Most derivatives are customized instrument and could exhibit substantial liquidity risk implying they may not be sold at a reasonable price within a reasonable period. Liquidity may decrease or evaporate entirely during unfavorable markets. Derivatives which are not traded on exchange are traded in the over-the-counter (OTC) market. OTC instrument are subject to the risk of counter party defaults which is known as credit risk. Several types of Volume 1, Issue 3, December 2014 www.kijrm.com Management 128
derivatives, including futures, options and forward are used as hedges to reduce specific risks. If the anticipated risks do not develop, the hedge may limit the fund s total return which is called as hedging risk. Due to above risk associated with derivatives, it is important to study what investors think about derivatives. LITERATURE REVIEW: (RAVICHANDRAN, 2008) Studied Investors Preferences towards various investment avenues in Capital Market with special reference to Derivatives. The study shows that in the current scenario, investing in stock markets is a major challenge ever for professionals. Derivatives acts as a major tool for reducing the risk involved in investing in the stock markets for getting the best results out of it. The study also focuses that investors should be aware of the various hedging and speculation strategies, which can be used for reducing their risk. Awareness regarding various uses of derivatives can help investors to reduce risk and increase profits. (Tripathi, 2014) Studied Investors Perception towards Derivative Trading. The study shows Indian investors mainly invest their money in real estates and insurance as they are the options offering great returns with minimum risk associated with it. It is found that more than 75 percent of investors are aware about derivatives, out of which 74 percent have invested in derivatives. Most of the users often invest 10 percent 20 percent of their total investment in derivatives followed by users who invest 20 percent 35 percent of their total investment in derivatives. Out of derivative users 76 percent investors have invested in options which offer benefits like risk diversification and promises their investors great profits with minimum investment. The study concluded that derivative market is dominated by male investor with 72 percent whereas female investors are only 28 percent. (Pasha, 2013) Studied Retail investors perception on financial derivatives in India. It is found that 55 percent of the small investors (respondents) are of the opinion that derivatives are new, complex, and high-tech products. 38 percent of the respondents, who are familiar with Volume 1, Issue 3, December 2014 www.kijrm.com Management 129
derivatives, said derivatives are not new, complex, and high tech products. And the remaining 7 percent of the investors could not answer the question. This shows that a large number of investors are not familiar with derivatives. The study also found that 62 percent of the small investors are of the opinion that derivatives are purely speculative and highly leveraged instruments. (DR. Y. NAGARAJU, 2014) Studied investors' perception towards derivative instruments and markets. The study shows that even though most people look at derivatives with fear, they should understand the fact that derivatives help in shifting the risk to the other party. There are many myths that surround derivative market. All these can be done away with proper system in place. Today institutional investors do most of the derivative transactions. It is very important that even individual investors participates in the derivative market actively and reap the benefits from it. After this study it is clear that derivative instruments and derivative markets are not so popular among individual investors. Only educated investors with the help of friends and brokers are investing in this market. The reasons for not investing in this market are lack of knowledge and very complex nature of instruments. Some people have a wrong perception about derivatives. The study suggests that measures should be taken to make sure that the investors get a right picture of the instruments and their risk factors. OBJECTIVE OF STUDY: To study the investor s perception towards derivatives. To identify the factors which affect the investment decision in derivatives. RESEARCH METHODOLOGY: Research design: Descriptive research design is used in the present study. Descriptive study is a fact-finding investigation with adequate interpretation. It is the simplest type of Volume 1, Issue 3, December 2014 www.kijrm.com Management 130
research and is more specific. Mainly designed to gather descriptive information and provides information for formulating more sophisticated studies. Sampling method: Convenience method of sampling is used to collect the data from the respondents Sample unit: Retail investors from Navsari city who invest in stock market Sample size: 100 Data collection method: Data is collected through questionnaire. Tools for Analysis: Charts, Pearson correlation test, Friedman rank test are used for analyzing the data. ANALYSIS: CHART 1: CHART SHOWING THE INFLUENCERS THAT AFFECT THE INVESTMENT DECISION IN DERIVATIVES: Volume 1, Issue 3, December 2014 www.kijrm.com Management 131
It can be seen from the above chart that 34 percent investors invest in derivative as they are aware about the derivatives. 24 percent investors invest in derivatives on the basis of guidance from their financial advisor. 19 percent investors decision is based on the broker s advice. 13 percent, 8 percent and 2 percent respondents decision is affected by media, friends and relatives advice and expert advice respectively. Chart 2: TYPE OF DERIVATIVES MOSTLY PREFERRED BY THE RESPONDENTS It can be seen from the above chart 47 percent of the respondents preferred to invest in stock index option, 41 percent respondents invested in stock index future, 8 percent of the respondents invested in future on individual stock and 4 percent of the respondents invested in option on individual stock. Volume 1, Issue 3, December 2014 www.kijrm.com Management 132
CHART 3: CHART SHOWING INVESTORS PERCEPTION TOWARDS DERIVATIVES AS AN INSTRUMENT APPROPRIATE ONLY FOR INSTITUTIONAL INVESTORS It can be seen from the above chart that 49 percent of the investors disagree that derivatives is appropriate only for institutional investors. 6 percent investors agree that derivatives is suitable for only corporate investors. 1. Ho: There is no significant correlation between age of the respondents with their decision to invest in derivatives. H1: There is a significant correlation between age of the respondents with their decision to invest in derivatives. Volume 1, Issue 3, December 2014 www.kijrm.com Management 133
Correlations Age Invest in derivatives **. Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Correlation is significant at the 0.01 level (2-tailed). Age Invest in derivatives 1.282 **..006 100 100.282 ** 1.006. 100 100 It can be seen in the above table that the correlation is 0.282. This means there is a significant correlation between age of the respondents and their decision to invest in derivatives. But the degree of correlation is less than 0.5. This shows that the association between these two variables is not that strong. It means that, at times these two variables i.e., age and investment in derivatives may not move in the same direction. 2. Ho: There is no significant correlation between income of the respondents with their decision to invest in derivatives. H1: There is a significant correlation between income of the respondents with their decision to invest in derivatives. Correlations Annual Income Have u invested in Derivatives **. Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) Correlation is significant at the 0.01 level (2-tailed). N Annual Income Have u invested in Derivatives 1 -.337 **..001 100 100 -.337 ** 1.001. 100 100 It can be seen from the above table that correlation is -0.337. It means there is a negative correlation between annual income of the respondents with their decision to invest in derivatives. Volume 1, Issue 3, December 2014 www.kijrm.com Management 134
An increase in the annual income leads to decrease in the frequency of investors to invest in the derivatives. 3. H0: There is no statistically significant preference for various factors such as hedging fund, risk control, cash generation etc while selecting investment in Derivative. H1: There statistically significant preference for various factors such as hedging fund, risk control, cash generation etc affecting Derivative while selecting investment in Derivative. Ranks Mean Rank Mean Rank Hedging fund 5.84 Return 8.04 Risk control 5.86 Past experience 8.03 Cash generation 8.03 Future growth 8.65 Potential for capital gain 7.99 Liquidity risk 9.73 Direct investment 8.72 Safety 10.10 High volatile 7.16 Margin in money 7.50 Easy in transaction 9.54 Knowledge 6.86 Less costly 9.21 Transparency 8.92 Tax benefits 7.70 Volume 1, Issue 3, December 2014 www.kijrm.com Management 135
N 100 Chi-Square 234.021 df 16 Asymp. Sig..000 a. Friedman Test It can be seen in the above table that hedging fund is the prime reason behind investing in Derivative having highest mean rank of 5.84 after that investor also considers risk control, knowledge and High volatility while investing in derivative having mean of 5.86, 6.86 & 7.16 respectively. It can be seen in the above table that value of significance is 0.000. it means there is a statistically significant preference for various factors such as hedging fund, risk control, High volatility etc affecting Derivative while selecting investment in Derivative. CONCLUSION: It can be concluded from the above study that most of the investors invest in derivative market on the basis of their own awareness, guidance from financial advisor and broker. Most of the investors preferred to invest in stock index fund rather than individual stock. Retail investors also considers investing in derivative segment as 49 percent of the investors are disagree that derivatives is appropriate only for institutional investors. There is a significant positive correlation between age of the respondents and their decision to invest in derivatives and there is a negative correlation between annual income of the respondents with their decision to invest in derivatives. Friedman test result shows that investors give more preference to some factors such as hedging fund, risk control, their own knowledge regarding financial product, and high volatility in the stock market etc. while taking decision to invest in derivatives. Volume 1, Issue 3, December 2014 www.kijrm.com Management 136
REFERENCES: 1. Ashutosh Vashishtha, S. K. (2010)., "Development of Financial Derivatives Market in India- A Case Study", International Research Journal of Finance and Economics (37). 2. DR. Y. NAGARAJU, S. R. (2014).,"A Study on Investors' Perception Towards Derivative Instruments and Markets", International Journal of Research In Commerce, Economics & Management, 4 (7). 3. Koti, P. K. (2014).,"Investors Preference Towards Stock Market and Other Investment Options",Indian Journal of Research in Management, Business and Social Sciences (IJRMBSS), 2 (1). 4. Mr. Thamotharan. A, D. G. (2013).,"Investors Perception on Derivatives Market, Indications from Derivatives Market in India with Special References to Dharmapuri District", International Journal Of Scientific Research, 2 (12). 5. Pasha, D. S. (2013).,"Retail Investors Percption On Financial Derivatives In India, European Scientific Journal, 9 (22). 6. Harish, A. S. (2001).,"Potential of Derivatives Market in India", The ICFAI Journal of Applied Finance, Vol. 7, No.5, pp 1-24. 7. Sahoo J. Shankar (2012)., Customer Perception Towards Secondary Market Trading In India, International Journal of Business and Management Tomorrow, Vol. 2 No. 3, pp 1-10. 8. RAVICHANDRAN, D. K. (2008, July-Sep).,"A Study On Investors Preferences Towards Various Investment Avenues in Capital Market With Special Seference to Derivatives", Journal of Contemporary Research in Management. 9. Tripathi, G. (2014).,"An Empirical Investigation of Investors Perception Towards Derivative Trading", Global Journal of Finance and Management., 6 (2), 99-104. Volume 1, Issue 3, December 2014 www.kijrm.com Management 137