PROBLEMS AND PROSPECTS OF MUTUAL FUND INVESTMENTS-A PERSPECTIVE STUDY ON KERALITES

Submitted to the University Grand’s Commission, In partial fulfillment of the requirements for the Minor Research Project.

By RATHEESH.K.NAIR

POST GRADUATE & RESEARCH DEPARTMENT OF COMMERCE GOVT.COLLEGE MADAPPALLY VADAKARA, KOZHIKODE

January 2016

Declaration

I hereby declare that the project report entitled "PROBLEMS AND

PROSPECTS OF MUTUAL FUND INVESTMENTS-A PERSPECTIVE

STUDY ON KERALITES" is a bonafide project work done by me and I further declare that this project work has not been submitted to any University or

Institution.

Kollam Ratheesh.K.Nair Date: 03.01.2017

Acknowledgement

It is with a sense of achievement and pride that I complete my project work. It has been made possible by the unstinting support of many people. These few words only convey my formal thanks but cannot convey the depth of my gratitude to them. I express my sincere gratitude to the Principal, Govt.College Madappally, faculty members at Department of Commerce and staff for their valuable suggestions and kind cooperation. I am deeply indebted to University Grants Commission for allotting the funds for the smooth conduct of the project. I take this opportunity to thank my fellow Ph.D. students and friends who were always there in times of need. I am deeply indebted to my parents and my wife for the moral support and encouragement in my academic pursuits. Above all I am thankful to the God, Almighty who has given me the strength,power and opportunity to complete this work successfully.

Ratheesh.K.Nair

Abstract

Kerala, obviously, one of the leading States in in terms of both human development and literacy. Unfortunately, the State could not realize such growth in capital market investments. The conditions are not different in mutual fund investments also. Hence, this research took efforts to investigate the underlying reasons for such financial market lagging in through the assessment of the problems and prospects of mutual fund investments from the perspectives of Investors there. The study also analysed the behavior and perception of investors for looking into the potentials of mutual fund investment in the State. Under a descriptive research framework, through rigorous statistical procedures on the multiple responses of investors, the study was able to make out prolific findings relevant to the development and growth of mutual fund market in Kerala. In Kerala, because of insufficient savings, the people prefer to invest in riskless assets like bank deposits, post office savings etc. However, investors surveyed in this research convinced their interests in market linked assets given the conditions of improved earnings. Inadequate investor protection measures and imperfect market conditions often perceived as the main risk factors that persuade the investors to keep their place outside the fund markets. Fund management still is a problem exists at aggravate level even among the mutual fund investors of the state. Better governance, customised investment products with more innovative features enable the Mutual Funds to penetrate more even into rural parts thereby can widen their client base in Kerala. Such actions can improve the investment conditions of the State thereby contribute more to its economic growth.

Contents

Chapter 1 Introduction ------1 1.1 Introduction ------1 1.2 Statement of the Problem------1 1.3 Significance of the study ------3 1.4 Scope of the Study ------4 1.5 Objectives of the Study ------4 1.6 Operational Definitions ------5 1.7 Hypotheses ------7 1.8 Research Design ------7 1.8.1 Source of Data ------7 1.8.2 Survey Instrument ------8 1.8.3 Survey Area ------8 1.8.4 Measurement of Variables ------8 1.9 Sampling Design ------10 1.10 Period of Reference ------14 1.11 Tools of Analysis ------14 1.12 Limitations of the Study ------15 1.13 Chapter Framework ------15 References ------16 Chapter 2 Review of Literature ------17

Chapter 3 Mutual Funds and Regulation in Indi ------3.1 Introduction 60 3.2 Trends in Resource Mobilisation by Private and public Sector Mutual Funds in India. ------61 3.3 Mutual Fund schemes ------64 3.4 Scheme –wise Resource Mobilisation ------66 3.5 Asset Under Management in India:Geographical Distribution ------67 3.6 State wise Penetration of Mutual Fund ------72

3.7 Mutual Fund investors ------78 3.7.1 Investor interest in Mutual Fund investment in India ------79

3.8 Private and public Sector Mutual Funds, investor participation and resource mobilisation ------86 3.9 Preferences of Kerala Investors in Mutual Funds ------86 3.10 Preferences of Kerala Investors in Mutual Fund schemes 87

3.11 Investor protection and regulatory mechanism of Mutual Fund ------83 3.11.1 Securities and Exchange Board of India ------84 3.11.2 Association of Mutual Fund Industry ------84 3.11.3 Stock exchanges ------85 3.11.4 Reserve ------85 3.12 Rights with respect to Management of the fund ------89 3.13 Regulatory Developments ------99 3.13.1 Investor Grievances and Redressal ------102 3.13.2 Redressal of complaints received against popular mutual funds…………………….…………105

3.17 Conclusion ------114 Chapter 4 Problems and prospects of Mutual Fund Investments in Kerala 117 4.1 Introduction ------117 4.2 Banking and Insurance products and Number of AMC Branches in Kerala ------127

4.3 AUM by Geography - Consolidated data for MF Industry in Kerala ------128 4.4 Investors in Kerala ------142 4.5 Behaviour of Individual Investors of Kerala ------176 4.6 Preference of Investment Avenues ------176

4.6.1 Investor Profile and Investment Preferences: Test of Association ------177 4.6.2 Relationship between Investor Category and Preference of Investment ------178

4.7 Perceived change in investment avenues given the increased savings ------191 4.8 Investor‟s priorities over investment features of Mutual fund ------201 4.9 Investors perception towards Problems in Mutual Fund Investment ------203

4.10 Prospects of Mutual Fund Investments in Kerala ------233 4.10.1 Prospective features in Mutual Fund Investment 235 4.10.2 Factors influencing the prospects of mutual Fund Investment ------235 4.10.2.1 Fund Promotion ------237 4.10.2.2 Role of Regulators ------238 4.10.2.4 Service provided by Mutual funds ------239 4.10.2.4 Fund performance ------239 4.10.2.5 Fund quality ------239 4.11 Prospects of Mutual Fund investment-Discriminant analysis ------239 4.11.1 Canonical Discriminant Functions ------241 4.12 Conclusion ------245 Chapter 5 Summary, Findings and Suggestions ------246 5.1 Introduction ------246 5.2 Regulatory mechanism of Mutual Fund ------248 5.3 Public and Private Sector Institutional Participation ------249 5.4 Investor Behaviour in Kerala ------251 5.5 Problems of Mutual Funds ------253 5.6 Services for Mutual Fund Investment ------254 5.7 Suggestions and Recommendations ------256 5.7.1 Product Design ------256 5.7.2 Use of Technology ------258 5.7.3 Investor Awareness ------258 8.3 Conclusion ------259 8.4 Contributions of the Study ------260 8.5 Scope for Further Research ------260 Bibliography ------262 Appendix ------277 List of Presentations & Publication ------282

List of Tables Table 1.1: Unit holding pattern of Mutual Funds Industry in India and Kerala-31.03.2010 ------15 Table 1.2: Selection of sample units from sample frame ------17 Table 3.1: Worldwide Number of Mutual Fund Schemes and Net Assets -2014 ------105 Table 3.2: Trends in Resource Mobilisation by Mutual Funds 2000 to 2015 ------106 Table 3.3: Mutual Fund schemes as on 31-March 2015 ------72 Table 3.4: Scheme-wise Resource Mobilisation and Assets under Management by Mutual Funds as on March 31, 2015 ------75 Table 3.5: AUM by Geography - Consolidated data for Mutual Fund Industry ------109 Table 3.6: State Wise Penetration of Mutual Funds in India- November 2015 ------113 Table 3.7: Unit holding pattern of all mutual funds as on March 31, 2015 ------80 Table 3.8: Private and public Sector Sponsored Mutual Funds, investor participation and resource mobilisation-2014-15 ------111 Table 3.9: Number of Respondents preferred different Mutual Funds ------220 Table 3.10: Number of Respondents preferred different Mutual Fund Scheme ------222 Table 3.11: Receipt and Redressal of Investor Grievances by SEBI-2000 to 2015 ------103 Table 3.12: Complaints received against Mutual Funds (MFs) during 2013- 2014-which are top six mutual funds in Kerala as on 31-03- 2014 ------226

Table 4.1: Geographical Factors of Kerala ------118 Table 4.2: Demographic Factors- Population (As Per 2011 Census) ------120 Table 4.3: Average Banking &Insurance product in Lakhs &Total No.Of AMC Branches in Kerala ------127 Table 4.4: AUM by Geography - Consolidated data for MF Industry ------129 Table 4.5: Penetration of Mutual Fund in Kerala - November 2015 ------130 Table 4.6: Mutual Fund wise contribution to AAUM of category of schemes for Mar-2015 in Kerala ------131 Table 4.7: Household use banking services – Kerala ------142 Table 4.8: Preference of Investment by investors in Kerala ------176 Table 4.9: Association between Investor Category and Preference of Investment ------178 Table 4.10: Change investor preference under the condition of increased savings ------191 Table 4.11: Change in investor preference at the increased saving level: Paired t test results ------193 Table 4.12: Investor‟s expectation about investment features of Mutual fund ------202 Table 4.13: Investors perception towards problems in Mutual fund investment ------205 Table 4.14: KMO and Bartlett's Test of Sphericity------206 Table 4.15: Total Variance Explained ------207 Table 4.16: Key factors affecting selection of mutual fund products ------208 Table 4.17: Tests of Equality of Group Means- With factor scoring ------240 Table 4.18: Eigen values - With factor scoring ------241 Table 4.19: Functions at Group Centroids - With factor scoring ------241 Table 4.20: Wilks' Lambda - With factor scoring ------242 Table 4.21: Standardized Canonical Discriminant Function Coefficients - With factor scoring ------243 Table 4.22: Structure Matrix- With factor scoring ------243 Table 4.23: Classification Results a, c - With factor scoring ------244

List of Figures Fig. 3.1: The graph indicates the growth of AUM over the years in India ------108 Fig. 3.2: Mutual fund schemes as on 31-March 2015 ------72 Fig. 3.3: AUM by Geography - Consolidated data for MF Industry- AMFI ------110 Fig. 3.4: Composition of AAUM in Kerala as on November 2015 ------114 Fig. 3.5: Unit holding pattern of all mutual funds as on March 31, 2015 ------80 Fig. 3.6: Private and public Sector Sponsored Mutual Funds, investor participation and resource mobilisation-2014-15 ------111 Fig. 3.7: Preference of Mutual funds ------221 Fig.3.8: Preference of Mutual fund schemes ------222 Fig. 4.1: Average Banking &Insurance product in crores & Total No.Of AMC Branches in Kerala ------128 Fig. 4.2: AUM by Geography - Consolidated data for MF Industry ------129 Fig. 4.3: Preference of Investment by investors in Kerala ------177 Fig. 4.4: Relationship of Investor Category and Preference of Investment ------178 Fig. 4.5: Change investor preference under the condition of increased savings ------192

Abbreviations AAUM Average Asset Under Management ACE AMFI's Code of Ethics AGNI AMFI's Guidelines and Norms for Intermediaries AMC Asset Management Company AMFI Association of Mutual Funds in India ARN AMFI Registration Number ASBA Application Supported by Blocked Amount AUM Asset under Management CAGR Compounded Annual Growth Rate CII Confederation of Indian Industry CRM Customer Relationship Management CSE DP ECS Electronic Clearing Service ELSS Equity Linked Savings Scheme ETF Exchange Traded Funds FCNR Foreign Currency Non-Resident account FEMA Foreign Exchange Management Act, 1999 FII Foreign Institutional Investor FIRC Foreign Inward Remittance Certificate FMCG Fast Moving Consumer Goods FMP Fixed Maturity Plan FOF Fund of Funds FPI(s) Foreign Portfolio Investor(s) GDP Gross Domestic Product GIC General Insurance Corporation GSDP Gross State Domestic Product HNI High Net worth Investors HUF Hindu Undivided Family IDFs Infrastructure Debt Funds IFA Independent Financial Advisor IRDA Insurance Regulatory and Development Authority ISC Investor Service Centre KIM Key Information Memorandum KVP Kisan Vikas Patra KYC Know Your Customer LIC Life Insurance Corporation of India MF Mutual Fund MFI Mutual Fund Investors MIN Mutual Fund Identification Number MMMF Money Market Mutual Fund NAV Net Asset Value NBFC Non-Banking Finance Company NCAER National Council for Applied Economic Research NEFT National Electronic Funds Transfer NFO New Fund Offer NISM National Institute of Securities Markets NMFI Non Mutual Fund Investors. NNP Net National Product. NOC No Objection Certificate NPA Non-Performing Asset NRE Non-Resident External account NRI Non-Resident Indian NRO Non-Resident Ordinary account NSC National Savings Certificate NSDP Net State Domestic Product NSFE National Strategy for Financial Education OCBs Offshore Corporate Bodies PAN Permanent Account Number PFRDA Pension Fund Regulatory & Development Authority PIO Person of Indian Origin PPF Public Provident Fund PWC PricewaterhouseCoopers QFIs Qualified Foreign Investors R& T Agents Registrar and Transfer Agent RBI REMFs Real estate mutual funds RGESS Rajiv Gandhi Equity Savings Scheme ROI Return on Investment. RTA Registrars & Transfer Agents RTGS Real Time Gross Settlement SAI Statement of Additional Information SAT Securities Appellate Tribunal SCORES Sebi COmplaints REdress System SEBI Securities and Exchange Board of India SHGs Self Help Groups SID Scheme Information Document SIP Systematic Investment Plans SMS Short Message Service SoA Statement of account SRO Self Regulatory Organisation STP Systematic Transfer Plan STT Securities Transaction Tax SWP Systematic Withdrawal Plan TER Total Expense Ratio UTI Unit Trust of India

` (Rs.) Rupees

1.1 Introduction

Mutual funds are the trusts which pool the scattered savings of investors and invest in marketable security portfolios. The term 'fund' is used to indicate the mutual fund, or any of its schemes. They create a range of products from investment avenues called mutual fund schemes to meet the varying needs and preferences of investors. Investors choose mutual funds based on the objective of the fund and their own investment objectives. Professional fund managers take care of the funds of investors and ensure steady return and capital appreciation.

The benefits from the investment of the pooled financial resources accrue to the investors who contribute to the pool. Thus, there is mutuality in the contribution and the benefit between the fund and the investors. That is why the fund is known as 'mutual fund‟. In United States, mutual funds have already been taken over by financial institutions and banks in offering the best possible returns on a set of diversified portfolios. In India many financial institutions and public sector banks have started their own mutual funds in line with global trend. But, this does not imply that mutual funds are full of benefits or intrinsic worth. They have their own set of problems relating to regulations, services, costs, performance, profitability, financial instability, decline of Net Asset Values (NAVs) which have been causing big concern to investors. The growing awareness of such issues discourages the prospective investors of mutual funds in many states of India including Kerala. However, favourable economic variables in the country indicate that Kerala has a bright future for mutual funds. It is highly useful to examine the factors responsible for this incongruous state of mutual fund investment in Kerala so as to throw light on its future prospects. 1.2 Statement of the Problem

A mutual fund, in its rudimentary conceptualisation, is a collection of stocks and/or bonds, where an investor holds a unit, which represents a part of the fund holding thereof. A proportionate sharing of income earned through such investors and capital appreciations witnessed by the schemes are duly carried out. It must, however, be mentioned that this proportional sharing by the unit holders is governed by the number of units owned by them. Mutual fund is, therefore, the most suitable investment option available to a common man as it provides an opportunity to invest in a diversified, yet professionally managed portfolio. Mutual funds act as a gateway to invest in big companies to an ordinary investor with his small investment.

Mutual funds offer benefits such as diversification, access to equity and debt markets at low transaction costs, liquidity etc. to the investors. Given these benefits, one would imagine that Indian households, characterized with gross domestic savings close to 28 per cent of the total GDP, one of the highest in the world, would congregate to invest their savings in mutual funds. Moreover mutual fund industry needs to get healthy participation from all states of the country. However, while considering the data published by AMFI the geographical distribution of assets under management (AUM) across cities in India is highly skewed in favour of the top five cities (Mumbai, Delhi, Chennai, Kolkata and Bangalore) which contribute over 70 per cent of the entire AUM in the country. The remaining 30 per cent is shared by the rest of the country.

The AUM/GDP ratio is the best indicator of the portion of income in a given state or district is being invested in mutual funds (SEBI, 2014).On looking at the investment conditions in India as a whole, the AUM/GDP ratio stand at 7 per cent while that of Kerala it is only at 3 per cent (AMFI,2015).Being a state with higher literacy rate of 93.91 per cent (Economic review,2012),the state expects to create a good investment culture among the people .However, relatively large deviation from the national average in AUM /GDP ratio signals the importance of many questions to answer :Why the investors of Kerala are showing less interest in mutual fund investment? What are the factors affecting the investment behaviour of Keralites? What are the problems faced by mutual fund investors in Kerala? Do the market regulators take appropriate measures to market the mutual fund products among investors? Since there is no prior study investigating these issues are available, particularly in the context of Kerala the present study makes a serious attempt to probe into these issues in detail.

1.3 Significance of the study

The Indian mutual fund industry has developed rapidly over the past ten years. The industry achieved a high AUM from Rs. 3.6 trillion in 2007 to Rs. 6.13 trillion in 2010, with an impressive growth rate of 16.2 per cent per year. From an average GDP growth rate of 8 to 9 per cent during the period from 2008 to 2011, the Indian economy is now growing at 7.4 percent in 2014-1 15(Annual report, 2015).

Economic growth of a country is closely associated with its domestic savings (Jangili, 2011) .No country can grow without having sound capital base supplied with its domestic savings and investment. The nature and rate of savings in an economy implies the rate of economic growth. Mutual fund investment schemes contribute good channel for profitable investments to households. So a study analysing the mutual fund markets definitely help investors including household investors to know more about the benefits of the schemes and motivate them to park their savings with the fund investments. This can lead economic growth through capital formation and financial market stability.

Financial markets are exposed to fast change in the modern globalised world. More innovative products, but with complex features, are emerging into the market and the investment of which demand sound knowledge base and good analytical skills. Normally it is beyond the reach of investors to gain mastery over investment science while optimising their investment function. Mutual funds are the creations of professional investment managers who have substantive knowledge in investment finance. Through this study ,both actual and potential investors can make out the various attributes of mutual fund schemes in terms of its risk, return and fund management efficiency that enable them to reap the benefits of professional investments with minimal complexity.

Professional investment managers can understand the general investor preferences and behaviour of Keralites. They can also identify the prime forces that restraining the investors of the state to be part of the mutual fund market .The information on both of these shall enable them to design fund scheme that has a perfect match with the investor expectations.

Policy makers of the country can grab useful insights on the problems of mutual fund investments from the perspective of investors in terms of the fund quality, fund distribution and fund performance. This may provide valid inputs for them to draft apposite policy framework conducive for the growth of mutual fund market in the state.

1.4 Scope of the Study

The study emphasises the problems and prospects of Mutual fund investment with respect to Keralites. The study covers both rural and urban counterparts. The research primarily aims at tracking investors‟ preferences and priorities of different investment avenues and identifying the key features of a mutual fund. Such information helps to design a new mutual fund product or redesign the existing schemes suitable for the financial market conditions of the economy. Besides the factors identified, the study provides key information inputs regarding problems of mutual fund investment and the expectations of investors in deciding marketing mix variables that guide the fund managers in designing profitable investment schemes in future for the Indian market. 1.5 Objectives of the Study

The clear definition of the research problem precincts its objectives as follows.

1. To identify the public and private sector institutional participation in Mutual fund.

2. To examine the regulatory mechanism of Mutual fund.

3. To study the extent of responsibility on the part of Mutual fund financial institutions in the reduction of investor grievances.

4. To assess the investor behaviour and mutual help of investors and experts in Mutual Fund Investment.

5. To evaluate the service provided by Mutual fund financial institutions in Kerala.

1.6 Operational Definitions

The variables, terms of specific measurement and testing criteria used in this study defined as follows.

♦Asset Management Company

Asset Management Company (AMC) is the asset manager of the mutual fund and is responsible for running the day to day operations of the mutual fund. The AMC is appointed by the trustees in consultation with the sponsor of the fund and with the approval of SEBI.

♦Assets Under Management (AUM)

Assets of a mutual fund refer to the market value of the securities held in the portfolio. There may be few receivables and accrued income, which are current assets. These are added to the portfolio value to get the total Assets Under Management (AUM) of the fund, its average for a period is known as Average Asset Under Management (AAUM).

♦ Centroids

It is the mean discriminant score of members in the group. It used for designing a decision rule to classify an investor into MFI/NMFI category.

♦Discriminant coefficient

It is similar to regression coefficient, reflects the relative contribution of each of the predictor variable on the discriminant function. A small value of the discriminant coefficient means that the impact of a unit change in a predictor variable is small in the discriminant function score.

♦Fund Manager

Fund Manager is the person who handles the money of the investors. He is concerned with decision regarding the investments, protection of value of the original investments and generation of a steady return on the original investment.

♦Intermediaries

All persons or entities concerned in selling and distribution of mutual fund products including inter alia brokers, consultants, sub-brokers, financial advisors, channel partners, sole proprietor firms, partnership firms, companies or called by any other name, but shall not consist of collection centers, where there is no element of advice, and it is only a counter for issuing forms and collecting completed applications.

♦Investor Categories

Investor Categories or Investor type is referred to as an individual or retail investor who has currently invested in any investment products. It includes Mutual fund Investor and Non Mutual Fund Investor. An investor whose name appears in the portfolio records of different mutual funds is Mutual fund Investors‟ (MFIs); all other investors are Non Mutual fund Investors‟ (NMFIs).

♦Investment Features.

Investment features include Safety, Liquidity, Return, Tax Savings, Govt. Regulation and Innovative Services. Among these safety, liquidity, return, tax savings are grouped into investor objectives. Government Regulation and contemporary services are grouped into investor requirements.

♦Investment Risk

Risk refers to the volatility of portfolio‟s value. Protection from volatility of portfolio‟s value or risk is Safety. Risk perception of the investors towards the mutual fund products is one of the factors to be analysed for studying the level of risk aversion.

♦Net Asset Value

Net assets of a fund refer to the market value of the portfolio, accrued incomes, less current liabilities and accrued expenses.Net Asset Value (NAV) is the value per unit at current market prices computed as net assets divided by units outstanding. Net Asset Value indicates the intrinsic worth of a scheme.

1.7 Hypotheses

The major hypotheses for the study include

1. Private sector Mutual Funds help to satisfy the investment needs of Mutual fund investors than Public sector Mutual funds. 2. Stringent regulatory frame work restricts the volume of Mutual Fund Investment. 3.The greater the reduction of investors grievance by Mutual Fund institution the lower the mutual fund investment.

4. Investors in Kerala are showing diverging behaviour in terms of their mutual help of investors and experts in Mutual Fund Investment.

5.There is no relationship between after investment service provided by Mutual Fund companies and investment in Mutual funds.

1.8 Research Design

The research design for the study is basically descriptive in nature but the objective of the study is to explore and obtain clarity about the problem situation and factors influencing the prospects of mutual fund investment. Here, the study makes use of discriminant model for deciphering sustainable marketing mix variables in the design and distribution of a new mutual fund product.

1.8.1 Source of Data

The study is based on primary as well as secondary data. Data collection process was made in two different stages. In the first stage, a review of literature was undertaken so as to acquaint with the various aspects of the study to formulate the conceptual framework for the research. In the second stage, primary data were collected with the help of a pre-tested and structured questionnaire that was finalised after a pilot study. The model of the questionnaire is given in Appendix.

Web sites of RBI, SEBI and AMFI constitute the prime secondary data sources. Many published and unpublished reports, text books, periodicals, journals, seminar proceedings, government publications and commission reports were also used for hypothesis designing, sampling consideration and for validating the information collected through primary source. 1.8.2 Survey Instrument

After discussion with officials of AMCs, stock broking firms, agents and distributors of MF products and experts in this field, a structured and quantifiable questionnaire was developed. The questionnaire consists of three parts. First part comprises of questions related to demographic features and saving/investment avenue preferences of investors. The second part of the instrument deals with questions for assessing the problems and prospects of mutual fund investment from the perspectives of Investors, and the last part consists of questions related to selection of mutual funds by the Mutual fund investors.

1.8.3 Survey Area

The present study focuses on the investors residing at Kerala. Kerala is a small state in India blessed with good climate and abundant natural resources. For the purpose of study Kerala grouped into three regions, it includes, Northern region (Kasargode, Kannur, Kozhikode, Wayanad, Malappuram) Central region (Palakkad, , Ernakulam, Idukki,) Southern region (Alappuzha, Kottayam Pathanamthitta, Kollam, Thiruvanathapuram). Central region is the main centers for mutual fund business in Kerala since they have highest AUM(AMFI,2015). The study was conducted across Central region districts in Kerala.

1.8.4 Measurement of Variables

The concepts and constructs of this study converted into empirically testable and observable variables. It includes dichotomous, categorical, continuous and other indefinite set variables.

♦ Saving and investment avenue preferences

For measuring the Preference of Investment Avenue by investors in Kerala, multiple responses was used, the researcher has considered ten investment alternatives which have been measured by marking top three investment options by investor preference on investment with current saving and that with increase in saving. For knowing priorities‟ the investor‟s preferences ranking and rating methodology were followed.

♦ Perception towards Investment Avenues

The analysis of perception towards investment avenues are measured in terms of the investors‟ priority of investment features. Ranking and rating methodology was followed to prioritize the investor‟s preferences.

♦ Risk Perception for Mutual Funds

Risk perception has been measured on a 5 point scale ranging from low risk „1‟ to high risk „5‟.

♦ Perception towards Mutual fund investment

In order to measure the investor‟s perception towards Mutual fund investment, six investment features, such as safety, liquidity, return, tax saving, Govt. regulation and service are considered and these variables were measured on a five point Likert-type scale ranging from „least requirement‟ to „most requirement‟.

♦ Problems of Investors

In order to measure the problems of investors regarding the mutual fund investment 15 variables were considered and these variables were measured through five point Likert-type scales ranging „least considered‟ to „most considered‟.

♦ Mutual fund selection parameters

In order to measure the investment decision parameters for selecting Mutual fund Investment four factors were considered and these factors were measured by marking appropriate decision option for mutual fund investment.

♦ Mutual Fund services For measuring the Mutual Fund services, considered by the investor while selecting mutual fund products, four variables of mutual fund service were taken into consideration and these items were measured through five point Likert-type scale ranging from „least considered‟ to „most considered‟.

♦ Prospective features in Mutual Fund Investment

The prospective features in mutual fund investment have measured with fifteen variables of investors‟ expectations in mutual fund investment and these items were measured through a five point Likert-type scale ranging from „least considered‟ to „most considered‟.

♦ Prospects of mutual fund investment

For measuring the prospects of mutual fund investment in Kerala four factors of investors‟ expectations in mutual fund investment (through factor analysis) were taken into consideration. Discriminant analysis is used to estimate the per cent of investors correctly classified as Mutual Fund Investor/Non Mutual

Fund Investor (to predict group membership), to find out the predictor variables are relatively better in discriminating between Mutual Fund Investor/Non Mutual Fund Investor, to classify a investor into one of the two groups by building a decision rule and cut-off score.

1.9 Sampling Design

It includes the process of selecting sample of investors from the population of investors.

♦ Population for the Study Individual investors in Kerala form the universe or population for the study. In this study particularly for analysing the prospects of mutual fund investment in Kerala, the opinion of both mutual fund investors and non mutual fund investors are highly essential. Accordingly the population has two parts in this research.

As per the data collection plan, primary data were collected from the individual Mutual fund investors living in Kerala and invested in mutual fund schemes. As on March-2010 there are nearest 19 Lakh Mutual Fund investors folio with 27 AMC‟s in Kerala (AMFI, 2010).According to the data Compiled from the records of SEBI and AMFI). The unit holding pattern of all mutual funds in India stood at 4,63,27,683 folios by the end of March 2010 among these, 4.1per cent folios from Kerala which constitute 18,99,435 folios (Table 1.1).

As per the data collection plan of the researcher, primary data were collected from the individual Mutual fund investors living in central region of Kerala and invested in mutual fund schemes. The investors in central region of Kerala who have so far not invested in mutual funds provide the universe for NMFI.

Table 1.1 Unit holding pattern of Mutual Funds Industry in India and Kerala-31.03.2010 Unitholding pattern of Mutual Funds Industry -INDIA AND KERALA. Number of % to total Net assets % to total net Category investors investors (Rs.crore) assets Accounts Accounts Individuals 46,327,683* 97.07 245,390.28 39.77

NRIs 943,482 1.98 27,428.86 4.45

FIIs 216 0.00 6,335.00 1.03

Corporates/ 452,330 0.95 337,812.58 54.75 Institutions/ Others TOTAL 47,723,711 100.00 616,966.72 100.00

Individuals in Kerala 18,99,435* 4.1 4588.01 0.02

Source: Compiled from the Official Records of SEBI -Annual Report-2010 and AMFI- geographical distribution of Mutual Fund Investors. *there may be more than one folio of an investor which might have been counted more than once and therefore actual number of investors may be less.

The entire population (universe-18, 99,435 folios and approximately 19 lakh Mutual fund investors) is divided into strata (grouped into three regions) which are mutually exclusive and collectively exhaustive. Northern region (Kasargode, Kannur, Kozhikode, Wayanad, Malappuram) Central region (Palakkad, Thrissur, Ernakulam, Idukki and Southern region (Alappuzha, Kollam, Kottayam, Pathanamthitta, Thiruvanathapuram).

The investors in Kerala who have so far not invested in mutual funds provide the universe for NMFI. Financial advisors from the central region (from four districts) include 230 ARN holder‟s (Table 1.2). They provide a list of NMFI which might be the prospective investors in Mutual Fund investment from their district.

♦Sample size

Since the investor populations in Kerala are quite large, the study determined the sample size of Investors using the approach of Cochran (1963). The equation used for this purpose is:

Where, n is the sample size, Z2 is the abscissa of the normal curve that cuts off an area α at the tails (1 - α equals the desired confidence level), e is the desired level of precision, p is the estimated proportion of an attribute that is present in the population, and q is 1-p. The value for Z is found in statistical tables which contain the area under the normal curve.

In this study, assuming p=0.5 (maximum variability under normal distribution with 95 per cent confidence level and ±5 per cent precision. The resulting sample size is 385, i.e.

= 385

The study rounded off this figure to 400. Accordingly 200 MFIs and 200 NMFIs were selected.

♦ Sample Frame and Selection of Sample units

The population of 19 lakh Mutual fund investors have their accounts (folio) in 27 AMC‟s in Kerala, these AMC have 58 branches all over Kerala (AMFI, 2010).The size of sample in each region is proportional to the number of AMC branches in each region. In central region 24 AMC branches and 230 ARN holders.

Sample Frame MFI NMFI Total no Total of Sample sample S.No. Region District AMC Sample Financial % % size size of Branches size-MFI advisors NMFI Investors with ARN Holders

1 Palakkad 2 8.33 17 29 12.61 25 42 2 Thrissur 7 29.17 58 65 28.26 57 115 CENTRAL 3 Ernakulum 15 62.50 125 112 48.70 97 222 4 Idukki 0 0.00 0 3 1.30 3 3 Total 24 100 200 230 100.00 200 400

Source:Compiled from the official records of AMFI*No of AMC Branches

Financial advisors with ARN Holders in Kerala as on 31March 2015.

The final sampling units of 200 MFIs were selected from the list provided by AMCs‟ and was based on judgment sampling method. The active involvement of fund investors measured in terms of frequency of investment, amount of investment and number of schemes they held provide the basis for judgment in sample selection.

For a comprehensive analysis of the problems and prospects related to mutual fund in Kerala a sample of 200 Non Mutual Fund Investors (NMFI) were also selected. Financial advisors from the three regions include 520 ARN Holder's. The size of sample in central region is proportional to the number of financial advisors in the region. At first advisors are selected on simple random basis from the list of ARN holders (central region) in the AMFI website. The selected ARN holders has provided a list of 2002 investors who have not so far preferred mutual funds as the destination point of their investment .To ensure parity in comparison 200 NMFI were selected on systematic random basis .For this purpose the study fix 10 (2002/200) as the sampling interval. From the numbers included in the interval, six has randomly chosen, thereafter every 6th investor in the list provided has been selected as the final sample unit of NMFI for the study and the procedure has completed the selection of 200 NMFIs. Thus the total sample size for the study became 400 investors: 200 MFIs and 200 NMFIs.

1.10 Period of Reference

Data required from the investors is very sensitive and indicative in nature as it comprises of the information regarding their savings and investments. Most of the investors are hesitant and unsecure in providing this kind of data on mails and phone calls. Hence, only possible way was self administered questionnaire. The survey was conducted during the period of 2013 January to 2014 March. Secondary data collected for the study were relating Mutual funds from 1964 to 2013-14.However, a longer duration and latest improvements has also been considered wherever necessary. 1.11 Tools of Analysis

The researcher has administrated rigorous statistical procedure for drawing useful inference from the collected data. The selection of the statistical design was based on both the objective pursued and the nature of the data used. The analytical methodology covered wide range of statistical tools of parametric or non parametric nature.

Chi square analysis as a test of association of attributes has been extensively used in this study. Association of attributes like demographic features, investor preferences and that of investor category with perception towards investment features, the level of risk perception and decision parameters for mutual fund investment were examined using Chi square analysis.

Independent sample t test verified the statistical significance of differences in mean perception score of MFIs and NMFIs towards various aspects of their investment programmes. Paired occurred t test examined whether there was any significant changes in investor preference at the increased savings levels.

Exploratory factor analysis was employed to reduce the number of variables/statements representing various problems of mutual fund investments into specific number of factors explaining the related problems. Such procedure can simplify the inference process; similarly the same methodology was adopted to identify the prospective features of mutual fund investment. Again using the same factor loading canonical discriminant analysis predict the investment features in the order of their priority which possibly included in the mutual fund innovation in future for canvassing more number of investors from NMFI group to MFI group.

1.12 Limitations of the Study

The present study is subject to the following limitations.

1. Some of the respondents are not ready to disclose their full investment details. 2. The study is based on primary data; hence personal bias of the respondents might have affected the results of the study.

3. The finding and implementation of the study are limited to 800 selected investors in Kerala.

1.13 Chapter Framework

In order to present the research report in a perfect and easily understandable manner, it is classified into seven chapters.

The Chapter -1: INTRODUCTION -This chapter focuses on the introduction, statement of the problem, significance of the study, scope of the study, objectives of the study, operational definition, hypotheses, research design, sampling design, reference period, primary data collection, tools of analysis, limitations and chapter frame work.

Chapter 2: REVIEW OF LITERATURE- In this chapter, an effort is made to review the available literature. It specifically reviewed the saving and investment, laws, regulations, literacy and marketing, analysis of financial intermediation, fund performance and investor behaviour. It helps to identify the research gap in the field of mutual fund.

Chapter 3: MUTUAL FUNDS AND REGULATION IN INDIA: The third chapter gives an overview of Trends in Resource Mobilisation by Private and public Sector Mutual Funds in India. State Wise Penetration of Mutual Fund , Mutual Fund investors , Preferences of Kerala Investors in Mutual Funds and schemes, Investor protection and regulatory mechanism of Mutual fund, regulatory developments, Investor Grievances and Redressal.

Chapter 4: Problems And Prospects Of Mutual Fund Investments In Kerala. : This chapter deals with geographic, demographic and economic factors in Kerala,Investors in Kerala, , behaviour of individual investors includes preference and perception towards investment avenues of Keralites. It also analyses the problems of quality and performance of Mutual fund investment, decision parameters for selecting mutual fund investment in Kerala. This chapter finally reports the statistical procedures adopted for analysing the prospects of MF investment, investors‟ expectations, prospective features in mutual fund investment and factors influencing the prospects of mutual fund investment. It is also devoted to discriminant model for deciphering sustainable marketing mix variables in the design of a new mutual fund product.

Chapter 5: SUMMARY, FINDINGS AND SUGGESTIONS- The last chapter presents the major findings of the study, summary of findings and implications, suggestions and recommendations, conclusion and scope for future research in the field.

References

1. AMFI (2010) Geographical distribution of Mutual Fund Investors. Geographical distribution of Mutual Fund Investors and Compiled from the records of AMCs.

2. AMFI (2015) Industry Trends, https://www.amfiindia.com/Themes/ Theme1/ downloads/home/ industry-trends-may-2015.pdf, http://www. amfiindia. com/research-information/aum-data/classified-average-aum-31/3/2015

3. Annual Report (2014-15) Ministry of finance (budget division- Advance Estimates) Govt.of India: Page V.

4. Cochran, W. G. (1963). Sampling Techniques, 2nd Ed., New York: John Wiley and Sons, Inc. 5. Economic Review (2012) State Planning Board,Thiruvanathapuram, Kerala, India.

6. Jangili Ramesh (2011) Causal Relationship between Saving, Investment and Economic Growth for India – What does the Relation Imply? - Reserve Bank of India Occasional Papers, Vol. 32(1), pp25-39.

7. SEBI (2014) Development Research Group Studies 2013 - 14, Securities and Exchange Board of India: p66.

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2.1 Introduction

The Indian mutual fund industry has developed rapidly over the past 10 years. Although a large number of studies have been carried out on the growth and financial performance of mutual funds in India, not much light has been shed on the causes for the low penetration of mutual funds in Kerala. The earlier studies paid more focus to performance measures, structure of fund, fund characteristics, managerial skills and behavioural patterns over time. The existing studies are very few and very little information is available about investor perceptions towards the problems and prospects of a mutual fund in Kerala. The following studies justify the relevance and importance this study and helps to identify the variables for the problems and prospects of a mutual fund investment in Kerala.

Nalini (1996) pointed that, mutual funds create awareness among urban and rural middle class people about the benefits of investment in capital market, through profitable and safe avenues. Mutual fund could be able to make up a large amount of the surplus funds by making people invest these funds.

Ramamurthy and Reddy (2005) conducted a study to evaluate recent trends in the mutual fund industry and draw a conclusion that the main beneficiaries will be the small investors “due to efficient management, diversification of investment, easy administration, nice return potential, liquidity, transparency, flexibility, affordability, wide range of choices and a proper regulation governed by SEBI”.

Mohanty (2006) analyzed the weakness of mutual funds. They are non availability of tailor-made schemes; no guarantee of returns, no control over costs, problem of managing large corpus, volatility of return depends on market conditions, which is subject to frequent market volatility. Market mutual funds scheme is for short period where return is not profitable and the instruments are lesser in number.

Surjit (2006) analysed the relationship between investors and mutual funds. Investors have started believing in mutual funds to manage their hard- earned money. Mutual funds are those institutions that can give maximum satisfaction to their investors by diversifying the portfolio. The mutual funds are becoming popular among the people who are more risk-averse than pure equity investors. Carefully managed mutual funds can ensure optimum returns even during turbulent times in the market and that makes the mutual fund a good choice among the retail investors. Due to the reduction in the bank interest rates and high degree of volatility in the Indian stock market, investors are looking for an alternative for their small time investment which can provide them a higher return and also safety to their investments.

Ahmed and Ahuja (2006) evaluated the cause and effect relationship between mutual fund investment decision and fund family, fund size, type of fund, type of portfolio and schemes, risk involved of the fund manager, past performance of the fund, liquidity factors and current market conditions.

Sasaki and Rathiha (2008) pointed out that the different variables which influence to invest on mutual funds are safety, liquidity, stability, speculative values, diversification and low cost. Through the study the researcher found that, the most important factors leading to mutual fund investments are risk freeness , income, savings and cost.

Thompson and Choi (2001) examined the role of laws governing investor protection, transparency of reporting, Insider trading, Taxation, the quality of enforcement of the laws, potential conflicts of interest between the fund and the fund investors and the ownership concentration across several countries and their financial development. Bhalla (2004) concluded that investors do not need to be familiar with the characteristics of the different types of mutual funds. Many investors do not understand what they are buying. With so many choices, investors risk making the wrong ones. Besides investing in appropriate and high-cost mutual funds, investors also buy laggards. There is no shortage of mediocre performers.

Singh and Chander (2004) analysed that, the perceptions about mutual funds in the view of general investor feels that different regulatory bodies like SEBI and others have not been able to regulate and control the working of mutual funds so as to safeguard the small investors‟ interest.

Khorana et al. (2005) found that consistent with related findings from the law and economics literature, the mutual fund industry is larger in countries with strong rules, laws, and regulations, specifically where mutual fund investors‟ rights are better protected. The industry is smaller in countries where barriers to entry are higher, measured by the effort required to set up a new fund. The fund industry is larger in countries with a wealthier and more educated population, and where the industry itself is older. Finally, the fund industry is larger in countries in which defined contribution pension plans are more prevalent. These results indicate that laws and regulation, supply-side, and demand-side factors simultaneously affect the size of the mutual fund industry.

Chander and Singh (2006) studied the preference of investors, the study revealed that, investor‟s decision to invest in a particular mutual fund is affected by different sources from where information about working of that fund becomes available to investor; they also opined that the occupation groups differ significantly in their perception about the returns received from the mutual fund.

Muller and Weber (2010) investigated the consequences of financial literacy in the context of mutual fund investments. They found that the level of financial literacy is not related to the performance of the actively managed funds. In contrast, overconfidence might prevent subjects from investing passively. A positive relation was found between the belief of being better than average in identifying superior investments and the likelihood of buying an active fund, thus confirming this notion. Also, better-than-average thinking is positively correlated with financial expertise.

Barber et al. (2005) argued that the purchase decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are more sensitive to salient in-your-face fees, like front-end loads and commissions, than operating expenses; they are likely to buy funds that attract their attention through exceptional performance, marketing, or advertising. They found consistently negative relations between fund flows and front-end load fees. A negative relation between fund flows and commissions charged by brokerage firms was also documented. In contrast, no relation (or a perverse positive relation) was found between operating expenses and fund flows. Additional analyses indicate that mutual fund marketing and advertising, the costs of which are often embedded in a fund‟s operating expenses, account for this surprising result.

Gurunathan (2007) examined, the investors need protection from the various malpractices and unfair practices made by the corporate and intermediaries. As the individual investors‟ community and the investment avenues are on the rise, it is interesting to know how the investors shall be protected through various legislations. The present positive attitude of investors is heartening though investor sentiments have been shaken by the various scandals.

Confederation of Indian Industry (2010) observed that Indian Mutual fund Industry is incapacitated by loads, investor awareness, governance and risk management, technology and low retail participations.

Grubber (1996) attempted to study the problem relating to the fast growth of mutual funds in spite of lower performance of actively managed portfolios. The study revealed that, mutual funds had negative performance compared to the market and provided evidence of persistency of underperformance. Sophisticated clients withdrew money from mutual funds during the period of low performance whereas mutual funds found money from disadvantaged clientele leading to the faster growth of funds.

Sondhi and Jain (2005) examined the performance of equity mutual funds classified on the basis of public sector and private sector. The paper evaluated the performance by comparing the returns to bench mark indices of Nifty and Sensex and found that the returns generated by private sector and public sector mutual funds are very inferior to market returns.

Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly select conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups.

Selvaraj and Devi (2007) examined the performance of mutual funds, they opined that “the performance of an actively managed fund largely depends on the investment decisions of its manager. Statistically, for every investor who outperforms the market, there is one who underperforms. Among those who outperform their index before expenses, though, many end up underperforming after expenses. Before expenses, a well-run index fund should have average performance. By minimizing the impact of expenses, index funds should be able to perform better than average” Agarwal et al. (2009) examined the performance of hedge funds relative to traditional mutual funds and found that trading strategies will improve the performance of hedge funds. Gil-Bazo et al. (2009) have examined the market for equity mutual funds and found that Funds with worse before-fee performance charge higher fees and that better fund governance may bring fees more in line with performance.

Gangadhar (1992) identified mutual funds as the prime vehicle for mobilization of household sector‟s savings as it ensures the triple benefits of steady return, capital appreciation and low risk. He identified that open-end funds were very popular in India due to its size, economies of operations and for its liquidity. Investors opted for mutual funds with the expectation of higher return for a given risk, greater convenience and liquidity.

Rajan,R.V., (1997) highlighted the segmentation of investors on the basis of their characteristics, investment size, and the relationship between stage in life cycle of the investors and their investment.

Massa et al. (1999) identified a set of systematic factors that explain a significant amount of the variation in flows. They examined common component to mutual fund investor behaviour and tried to find out which asset classes may be regarded as economic substitutes by the participants in the market for mutual fund shares. They found that flows into equity funds, both domestic and international, are negatively correlated to flows to money market funds and precious metals funds. This suggests that investor rebalancing between cash and equity explains a significant amount of trade in mutual fund shares. The negative correlation of equities to metals suggests that this timing is not simply due to liquidity concerns, but rather to sentiment about the equity premium. This paper also finds that the factors derived from flows alone explain as much as 45 per cent of the cross- sectional variation in mutual fund returns. Walia and Kiran (2009) analysed mutual fund as an investment avenue is preferred by those investors who don‟t want to take complete risk of capital market volatility or those investors who want to rely on professional knowledge of mutual funds AMCs. Survey results reveal the fact that very few investors rank mutual funds as most preferred investment avenue and rank it at first position.

Basil (2013) the service quality is the dominant factor influencing fund selection behaviour. The fund preference of mutual fund investors depends on their time horizon and risk perception. Mutual fund investors in Kerala give more preferences towards open-ended and growth oriented (equity funds) schemes.

Although research on mutual fund is quite extensive in India and international context, the studies investigating the behavioural aspects of fund investment are relatively scanty. Moreover, most of the research has selected sample from the mutual fund investor group only for surveying their perception or experience on different aspects of fund investment. No academic research in India, particularly in Kerala has included the non mutual fund investor group in the survey. While probing in to the reasons for their apprehensions or difference towards the fund investment. Thus the present study proposes to carry out survey among both MFI‟s and NMFI‟s for identifying the problems and prospects of mutual fund investment in Kerala. With high literacy rate, larger per capita and lower contribution to the mutual fund segment, Kerala definitely provide a good representation of sample for studying the problems and prospects of mutual fund investment.

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Chapter 3

MUTUAL FUNDS AND REGULATION IN INDIA 3.1 Introduction

Worldwide Net Assets shows United States have 15,852.34 USD Billions Total

Net Assets in 2014(Table-3.1). The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital and financial markets. The latest available mutual fund data shows that the AUM has risen significantly, to Rs.19,94,985 crore (USD 192 billion) by May 2015(AMFI,2015). With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.

Table-3.1 Worldwide Number of Mutual Fund Schemes and Net Assets -2014 Top ten Countries and India’s Total Net Assets (In USD Billions) and Number of Mutual Fund Schemes # Total Net Assets (In USD Number of Mutual Fund Sl.No. COUNTRY Billions) Schemes 2010 $ 2014 $ 2010 2014 1 United States 11,832.99 15,852.34 7,554 7,923 2 Luxembourg 2,512.87 3,208.26 9,353 9,839 3 Australia 1,455.85 1,601.13 N/A N/A 4 Ireland 1,014.10 1,547.34 2,899 3,462 5 France 1,617.18 1,391.27 7,791 7,082 6 United Kingdom 854.41 1,182.18 2,204 1,920 7 Brazil 980.45 989.54 5,618 8,560 8 Canada 636.95 981.80 2,117 3,164 9 Japan 785.50 780.64 3,905 5,404 10 China 364.99 708.88 660 1,763 111.421 134.63 658 723 11 INDIA *(613979-Crore) *(825240-Crore) * (882) *( 1638) Notes: (1) N/A = not available 2-#Country in which more than 700 Billion USD in total Net Asset in 2014. Source: International Investment Funds Association (2015 Investment Company Fact Book) *Handbook of Statistics on Indian Securities Market 2014.

3.2 Trends in Resource Mobilisation by Private and public Sector Mutual Funds in India.

Mutual fund industry continued to exhibit positive growth in assets under management in 2013-14. The gross mobilisation of resources by all mutual funds during 2013-14 was at Rs.97, 68,100 crore compared to Rs.72, 67,885 crore during the previous year indicating an increase of 34.4 percent over the previous year (Table-3.2). Correspondingly, redemption also increased by 35.1 percent to Rs.97, 14,318 crore in 2013- 14 from Rs.71, 91,346 crore in 2012-13. The net resources mobilised by all the mutual funds aggregated to Rs.53,782 crore in 2013-14 compared to net inflow of Rs.76,539 crore in2012-13. As of at the end of March 2014, the cumulative net assets managed by all the mutual funds totaled to Rs.8, 25,240 crore as against Rs.7,01,443 crore at the end of March 2013, representing a rise 17.6 per cent.

Table-3.2: Trends in Resource Mobilisation by Mutual Funds ( Crore) 2000 to 2015 Assets at the Gross Year Redemption* Net Inflow End of Period Mobilisation (AUM) 1 2 3 4 5 2000-01 92,957 83,829 9,128 90,587 2001-02 1,64,523 1,57,348 7,175 1,00,594 2002-03 3,14,706 3,10,510 4,196 1,09,299 2003-04 5,90,190 5,43,381 46,808 1,39,616 2004-05 8,39,708 8,37,508 2,200 1,49,600 2005-06 10,98,149 10,45,370 52,779 2,31,862 2006-07 19,38,493 18,44,508 93,985 3,26,292 2007-08 44,64,377 43,10,575 1,53,802 5,05,152 2008-09 54,26,353 54,54,650 28,296 4,17,300 2009-10 1,00,19,023 99,35,942 83,080 6,13,979 2010-11 88,59,515 89,08,921 -49,406 5,92,250 2011-12 68,19,679 68,41,702 -22,024 5,87,217 2012-13 72,67,885 71,91,346 76,539 7,01,443 2013-14 97,68,100 97,14,318 53,782 8,25,240 2014-15 1,10,86,259 1,09,82,971 1,03,287 10,82,757 * Includes repurchases as well as redemption. Source: SEBI Annual Report 2000-01 &2014-15

The Fig 3.1 indicates the growth of AUM over the years in India. AUM IN INDIA 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AUM Linear (AUM)

Figure 3.1 The graph indicates the growth of AUM over the years in India.

3.3 Mutual Fund Schemes

Mutual funds can be of three basic types, depending on how they are offered for purchase and redemption: open-ended, close-ended and interval funds (Table 3.3 and Fig.3.2)

Table 3.3: Mutual Fund schemes as on 31-March 2015

Schemes Open-ended Close-ended Interval Total A. Income/ Debt Oriented Schemes 364(356) 910(757) 72(65) 1,346(1,178) B. Growth/ Equity Oriented Schemes 342(325) 92(38) 0(0) 434(363) C. Balanced Schemes 25(29) 0(1) 0(0) 25(30) D. Exchange Traded Fund 48(40) 0(0) 0 (0) 48(40) E. Fund of Funds Investing Overseas 31(27) 0 (0) 0 (0) 31(27) TOTAL (A+B+C+D+E) 810(777) 1,002(796) 72(65) 1,884(1,638) 1. Figures in parentheses indicate corresponding figures for 2013-14. Source: SEBI Annual Report-2014-15

1200

1000 Fund of Funds Investing Overseas 800 Exchange Traded Fund

600 Balanced Schemes

400 Growth/ Equity Oriented Schemes 200 Income/ Debt Oriented Schemes

0 Open-ended Close-ended Interval

Fig-3.2 Mutual fund schemes as on 31-March 2015

Maturity-wise there were 777 open-ended schemes, 796 close-ended schemes and 65 Interval Schemes as on March 31, 2014. For the income/debt oriented schemes category, the number of close-ended schemes exceeded open- ended schemes. In 2015; there were 810 open-ended schemes, 1002 close-ended schemes and 72 Interval Schemes (Table 3.3).

The simplest way to categories‟ mutual fund products is to look at the investment objective and the portfolio of the fund. A fund may se3k to invest the money it mobilises from investors in debt instruments, equity instruments, in commodities such as gold, in international funds and securities, in other funds, in derivatives or some combination of these investment options. So the four broad categories (Mutual fund Schemes) are:

 Equity funds investing in equity securities.  Debt funds investing in short and long-term debt instruments.  Hybrid funds investing in a combination of equity and debt.  Other funds including international, commodity, and fund of funds.

The return that a fund may offer and the risk it carries depend on the investment portfolio.

3.4 Scheme-wise Resource Mobilisation The appropriate fund for investment by an investor is one whose investment objective matches that of the investor. Mutual fund Schemes may be fitted to investor objectives based on four basic criteria: risk (safety), return, tax and liquidity. Selection of funds requires evaluation of these features, before making an investment decision.

As on 31 March 2014, there are 50mutual funds with 1,638 schemes (29091 scheme NAV names) and the asset under management as Rs 825240 crore(As on 31 March 2015 Rs.10,82,757 crore ) with three scheme type such as Open-ended, Close-ended & Interval and different scheme category (Portfolios) such as Growth, Income, Balanced, Equity Linked Savings Scheme (ELSS), Liquid, Gilt, Fund of Funds(FOF),Gold ETF, Assured Return, Money Market, Floating Rate, Other ETFs and so on that caters to the investors‟ needs, risk tolerance and return expectations.

As on 31 March 2015, there are 1884 schemes Out of the total Mutual Fund Scheme (1884), 1346 were income/debt oriented schemes, 434 were growth/equity oriented schemes and 25 were balanced schemes. In addition, there were 48 Exchange Traded Funds, of which 14 were Gold ETFs and 34 other ETFs. Also, there were 31 schemes operating as Fund of Funds which invested in overseas securities, Table-3.4.

AUM was the highest for income/debt oriented schemes at Rs. 6,94,128 crore with a growth of 15.5 percent while AUM for growth/equity oriented schemes increased by 80.6 percent to Rs.3,45,139 crore, Table-3.4.

Table 3.4 Scheme-wise Resource Mobilisation and Assets under

Management by Mutual Funds as on March 31, 2015

crore) crore)

` `

Schemes

Assets Under Under Assets Management Under Assets Management

No. Schemes of No. Schemes of No. Schemes of

March 31, 2010March 31, 2014March 31, 2015March 31,

on3/31/2014( on3/31/2015( 1 2 3 4 5 6 A. Income/ Debt Oriented Schemes

i) Liquid/Money Market 56 53 1,33,280 52 162562 ii) Gilt 35 44 6,114 45 14614 iii) Debt (other than assured returns) 367 1,077 4,60,672 1245 515772 iv) Infrastructure development 0 4 879 4 1179 Subtotal (i to iv) 458 1,178 6,00,945 1346 694128 B. Growth/ Equity Oriented Schemes

i) ELSS 48 52 25,547 55 39470 ii) Others 307 311 1,65,560 379 305669 Subtotal (i+ii) 355 363 1,91,107 434 345139 C. Balanced Schemes

Balanced schemes 33 30 16,793 25 26368 D. Exchange Traded Funds i) Gold ETF 7 14 8,676 14 6655 ii) Other ETFs 14 26 4,528 34 8060 Subtotal (i+ii) 21 40 13,204 48 14715 E. Fund of Funds Investing Overseas Fund of Funds investing overseas 15 27 3,191 31 2408 TOTAL (A+B+C+D+E) 882 1,638 8,25,240 1884 1082757 Source: SEBI Annual Report-2009-10, 2013-14, 2014-15 AUM of gilt schemes in 2014-15 increased by 139 percent, followed by a rise of 84.6 percent in „others‟ schemes of growth/equity oriented schemes and a 78.0 percent increase in „other‟ ETF schemes. Except the fund of funds investing overseas schemes and gold ETFs, all the schemes registered an increase in AUM over the previous year. The highest decline in AUM was registered for fund of funds investing overseas schemes at 24.5 percent.

3.5 Assets Under Management in India: Geographical Distribution

For savings to be streamlined into the capital market, investors need to first and foremost be made aware of avenues and opportunities. The mutual fund industry is yet to spread its reach beyond big cities. The top five cities contribute 72.13per cent of the AUM, the remaining 27.87per cent distributed among other cities. Statistics show that in December 2014, penetration in the top five cities increased to 72.13per cent as compared to 71.12per cent in March 2012, whereas for cities beyond the top five, penetration has decreased. One of the prime areas the industry is focusing on is developing the penetration ratio and increasing its presence in other cities. Table 3.5 and Fig.3.3.

Table 3.5 AUM by Geography - Consolidated data for Mutual Fund Industry AUM by Geography - Consolidated data for Mutual Fund Industry As on 31- As on 31- As on 31- As on 31- Mar-2012 Mar-2013 Mar-2014 Mar-2015 Geographical AUM PERCENTAGE % Classification 1 Top 5 Cities 71.12 74.04 72.92 71.91 2 Next 10 Cities 14.04 12.37 13.43 13.64 3 Next20 Cities 6.6 5.72 5.78 6.00 4 Next 75 Cities 5.58 5.11 5.26 5.40 5 Other Cities 2.66 2.76 2.61 3.05 100 100 100 100 Source: AUM by Geography - Consolidated data for MF Industry-AMFI The business from the top five cities Mumbai, New Delhi, Bangalore, Kolkata and Chennai was average73per cent of the total assets under management and the bottom cities average was 3per cent only. The Mutual Fund industry saw a 24 percent growth in assets between May 2014 and May 2015. There were concerns that the growth had only been focused on top 15 metro towns since inception. This made SEBI allow higher commissions for increasing the reach in smaller towns. Thus, while the total growth has been 24 percent, growth in AUM from B15 cities between May 2014 and May 2015 has been 54 percent, while that in the T15 cities has been 18 per cent (AMFI, 2015). This has led to concerns that this growth is on account of mis-selling especially given the fact that higher commissions can lead to aggressive sales in lesser financial literate towns. This leads to the importance of regulators in Mutual fund Investments.

As on 31 March 2015 Assets under management in India: Geographical distribution- AMFI

Top 5 cities Next 10 Cities Next 20 Cities Next 75 Cities Other Cities

5% 3% 6%

14%

72%

Fig. 3.3 AUM by Geography - Consolidated data for MF Industry-AMFI Source: Assets under management in India: Geographical distribution- AMFI

3.6 State Wise Penetration of Mutual Fund

Industry highlights of CRISIL (2014) states that the domestic mutual fund industry maintained the positive momentum in the last quarter of 2014. Average assets under management (AUM) rose to a record high and exceeded the Rs. 11 trillion mark. Average AUM rose 4.39per cent or by Rs 465.41 billion to Rs. 11.06 trillion (excluding fund of funds) in the quarter ended December 2014 as per the data released by the Association of Mutual Funds in India (AMFI). The industry's average assets increased 26.21per cent or by Rs. 2.30 trillion in 2014 ,the fastest calendar year growth since the industry started declaring quarterly average assets in September 2010. Growth in the latest quarter was mainly driven by rise in equity funds' assets; the industry's total gain would have been higher but for the decline in AUM of liquid funds, FMPs and gold exchange traded funds (ETFs). Equity funds, which were the toast of the industry the entire year, were the primary driver of industry assets in the latest quarter. The category's average AUM gained 15.74per cent or Rs 457.25 billion to a record high of Rs 3.36 trillion. For the year, the category gained 71.99per cent or Rs 1.41 trillion, the largest calendar year gain since the industry started declaring average assets (since September 2010). Growth was led by robust inflows and mark to market (MTM) gains. The category registered inflows of Rs. 589.39 billion in 2014 compared with outflows of Rs. 117.92 billion in 2013. The domestic equity market as represented by the CNX Nifty gained 31.39per cent in 2014 compared with 6.76per cent returns in 2013.

Table 3.6 State Wise Penetration of Mutual Funds in India- November 2015

AAUM Composition of Per capita Existing Penetration Rs.in Crore AAUM AAUM % No Of AMC Equity Non-

Of GDP Branches % Equity % 1 Jammu and Kashmir Rs. 750 Rs. 900 1 13 71 29 2 Himachal Pradesh Rs. 1,730 Rs.1200 1 10 67 33 3 Punjab Rs. 4,660 Rs.12900 4 64 50 50 4 Uttarakhand Rs. 2,650 Rs.2700 2 21 62 38 5 Haryana Rs. 24,770 Rs.62800 14 36 20 80 6 New Delhi Rs. 82,850 Rs.138800 31 46 31 69 7 Uttar Pradesh Rs. 2,220 Rs. 44,300 5 161 49 51 8 Rajasthan Rs. 5,460 Rs.37500 7 72 22 78 9 Madhya Pradesh Rs. 1,410 Rs.10300 2 63 68 32 10 Bihar Rs. 630 Rs.6600 2 46 72 28 11 West Bengal Rs. 7,500 Rs.68500 9 99 37 63 12 Sikkim Rs. 4,840 Rs.300 2 0 43 57 13 Assam Rs. 1,200 Rs.3700 2 22 52 48 14 Arunachal Pradesh Rs. 1,120 Rs.200 1 1 36 64 15 Nagaland Rs.1290 Rs.300 1 1 52 48 16 Manipur Rs. 760 Rs.200 1 1 51 49 17 Mizoram Rs. 1,720 Rs.200 2 0 9 91 18 Tripura Rs.1240 Rs.500 1 5 25 75 19 Meghalaya Rs. 2,720 Rs.800 3 4 48 52 20 Jharkhand Rs. 1,900 Rs.6300 3 43 66 34 21 Chhattisgarh Rs. 2,070 Rs.5300 3 32 46 54 22 Orissa Rs. 2,510 Rs.10500 3 55 35 65 23 Gujarat Rs. 13,570 Rs.82000 9 161 38 62 24 Rs. 52,000 Rs.5,84300 35 200 26 74 25 Telangana Rs. 3,550 Rs.12500 3 32 46 54 26 Goa Rs. 68,590 Rs.10000 21 25 47 53 27 Rs. 16,130 Rs.98600 14 116 34 66 28 Rs. 6,800 Rs.33300 6 54 46 54 29 Kerala Rs. 4,080* Rs.13630 3 67** 45 55 30 Rs. 8,630 Rs.62300 6 112 34 66 31 Andaman and Rs. 1,190 Rs.0 Crore 1 1 69 31 Nicobar Islands Source: AMFI-Geographical Spreads- November 2015 *Per capita- It is a gauge for measuring living standard, is estimated -per month at constant prices ** http://www.amfiindia.com/amc-branches

India's per capita income, a gauge for measuring living standard, is estimated to have gone up 11.7 per cent to Rs 5,729 per month in 2012-13 at current prices, compared with Rs 5,130 in the previous fiscal. The estimated rate of growth in per capita income for the current fiscal, however, is lower than the previous fiscal when it grew by 13.7 per cent.

Composition of AAUM in Kerala as on November 2015

45 Equity %

55 Non- Equity %

Fig. 3.4 Composition of AAUM in Kerala as on November 2015

As per Table 3.6 State Wise Penetration of Mutual Funds in India on November 2015, per capita income in Kerala was Rs.4080, AAUM was Rs.13630 Crore , penetration of mutual fund investment in Kerala was just 3per cent Of GDP (of 67 AMC Branches in Kerala). As per Fig 3.4, 55 per cent Mutual fund investors in Kerala prefer non equity mutual fund schemes and 45 per cent prefer equity schemes in Mutual funds. Compared to other states in India, the reason for the present condition and its prospective requirements are analysed.

3.7 Mutual Fund investors

Investors in mutual funds may be resident individual, institutional investors,

NRIs, Flls and PIOs. They are allotted a folio number when they make a first purchase with a fund house, whether in an NFO or in an existing scheme. The R&T agent of the scheme creates a folio for the investor under which all transactions are recorded. Investor folio number is like a bank account number. Investors can hold units of multiple schemes of a fund house, under one folio (Table 3.3).

As on March 31, 2015, while individuals subscribed 97.28 percent of the total folios, their share in the total net assets was 46.92 percent. On the other hand, corporate/institutions had a miniscule share of 0.92 percent in the total number of folios, their share in the total net assets was significant at 47.64 percent. In comparison to 2012-13, the percentage share of individuals in the total folios (96.9 to 97.28) and share in net assets (45.73 to 46.92) had increased. NRIs/OCBs with

1.75 percent share in folios had 3.82 percent share in total net assets (2014-15).

As per the Table 3.7, Fig.3.5,as on 31 March 2015 Rs 10,82,757.4 crore AUM and 4,17,40,206 investors folios, compared to Rs.6,13,979 crore AUM and

4,77,23,711 investors folios on 31 March 2010.

Table 3.7 Unit holding pattern of all mutual funds as on March 31, 2015

Unit holding pattern of all mutual funds as on March 31, 2015 Investor 2012-13 2013-2014 2014-15 % No. of % No. of % % of Category AUM Folios Folios AUM 1 2 3 4 5 6 7 8 46.92 Individuals 96.9 39042636 97.19 40606623 97.28 508032 (45.73) 3.82 NRIs/OCBs 1.8 783048 1.95 731081 1.75 41363 (4.70) 1.62 FIIs 0.0 432 0.00 19798 0.05 17546 (0.96) Corporates/ 47.64 Institutions/ 1.2 345525 0.86 382704 0.92 515816 (48.61) Others TOTAL 100 40171641 100 41740206 100 1082757 100 Notes: Figures in parentheses indicate corresponding figures for 2012-13 Source: SEBI Annual Report 2012-13 to 2014-15

No. of Folios as on March 31, 2015 AUMas on March 31, Individuals 2015 Individuals

NRIs/OCBs NRIs/OCBs

FIIs FIIs

Fig-3.5 Unit holding pattern of all mutual funds as on March 31, 2015

Table3.7 and Fig.3.5 shows the AUM and folios of Retail Investor/HNI, it exhibit the comparative changes in AUM and folios over the years from 2010 to 2015.

Retail&HNI Investors Retail&HNI Investors No AUM (Rs. Cr) as on of Folios as on March March 31, 2015 31, 2015

Liquid Liquid

Gilt Gilt

Debt Debt

Equity Equity

Fig-3.5 Asset under Management and Folios - Retail Investor/HNI* Classification as on March 31, 2015 3.8 Private and public Sector Mutual Funds, investor participation and resource mobilisation

At the end of March 2015 the private sector mutual funds retained the dominant place in the mutual fund industry with Rs. 917762 Crore Asset under Management, and in Public sector mutual fund holds Rs. 164995 Crore Assets Under Management, it is presented in Table 3.8 and in Fig.3.6.

Table 3.8: Private and public Sector Sponsored Mutual Funds, investor

participation and resource mobilisation-2014-15

crore)

crore)

Investor

Category

Rs. In Rs.

under under

Sector AUM)

(AUM)

No. of Folios No. of Folios No.

under Public under

Private Sector Private

NAV ( Rs.in Rs.in ( NAV

Percentage to Total to Percentage

NAV ( ( NAV

Public Sector Sector Sector Public

Percentage to Total Folios Folios Total to Percentage

Folios under Private Sector Private under Folios

Percentage to Total Net Assets Assets Net Total to Percentage Assets Net Total to Percentage 1 2 3 4 5 6 7 8 9 Private Sector Sponsored Mutual Funds Public Sector Sponsored Mutual Funds 2014-15 Individuals 2,62,85,069 96.6 425238 46.3 14321554 98.6 82794 50.2 NRIs/OCBs 6,01,263 2.2 37200 4.1 129818 0.9 4163 2.5 FPIs 19,788 0.1 17502 1.9 10 0.0 44 0.0 Corporates/ Institutions/ 3,15,761 1.2 437822 47.7 66943 0.5 77994 47.3 Others Total 27221881 100 917762 100 14518325 100 164995 100 2013-14 Individuals 24885093 96.3 304711 44.1 14157543 98.8 66194 47.6 NRIs/OCBs 662677 2.6 30181 4.4 120371 0.8 3415 2.4 FPIs 207 0.0 7776 1.1 225 0.0 5898 4.2 Corporates/ Institutions/ 294932 1.1 348018 50.4 50593 0.4 63662 45.7 Others Total 25842909 100 690688 100 14328732 100 139170 100 Note: UTI figures are reported with public sector mutual funds. Source: SEBI Annual Report-2014-15 Percentage to Total Net Assets under Private Sector-2014-15

Individuals

47.7 46.3 NRIs/OCBs

FPIs

1.9 4.1 Corporates/Inst itutions/Others

Percentage to Total Net Assets underPublic Sector-2014-15

Individuals 47.3 NRIs/OCBs 50.2 FPIs

Corporates/Instit 0 2.5 utions/Others

Fig. 3.6 Private and public Sector Sponsored Mutual Funds, investor participation and resource mobilisation-2014-15

Individual investors (50.2%) prefer to invest in public sector sponsored mutual funds.

3.9 Preferences of Kerala Investors in Mutual Funds

The name of the mutual fund which, the investor prefers to invest shall definitely be a factor deciding the success of investment. The survey reveals that following Mutual funds and asset management companies are preferred by Mutual Fund Investors in Kerala.

Table 3.9 Number of Respondents preferred different Mutual Funds

Sl. No of Percentage of Mutual Funds * No. Respondents Respondents 1 - Axis Asset Management Co. Ltd. 24 11.45 2 HDFC Mutual Fund-HDFC Asset Management Company Limited 48 39

3 Reliance Mutual Fund-Reliance Capital Asset Mgmt. Ltd. 60 29.45 Kotak Mahindra Mutual Fund-Kotak Mahindra Asset Management 11 5.25 4 Company Limited.

5 Tata Mutual Fund-Tata Asset Management Limited 20 9.45

6 SBI Mutual Fund-SBI Funds Management Private Limited 145 42.25

4 Sundaram Mutual Fund -Sundaram Asset Management Company Ltd 14 4 ICICI Prudential Mutual Fund-ICICI Prudential Asset Management 96 48 8 Company Ltd DSP Black Rock Mutual Fund-DSP Black Rock Investment Managers 11 5.5 9 Private Limited Birla Sun Life Mutual Fund-Birla Sun Life Asset Management Company 46 23 10 Limited Franklin Templeton Mutual Fund-Franklin Templeton Asset 24 12 11 Management (India) Private Limited.

12 UTI Mutual Fund-UTI Asset Mgmt. Co. Ltd. 104 51.45 *Multiple responses Source: Survey data It is understood from the analysis of Table 3.9 and exhibit in Fig.3.7 that SBI mutual fund occupying the prime position in winning the attraction of fund investors in Kerala. Out of 400 mutual fund investors surveyed with multiple response option, 42.25 per cent prefer to invest in SBI mutual funds. Another public sector fund, UTI mutual fund is preferred by 51.45 per cent investors. ICICI prudential and HDFC mutual fund are also considered for investment by a significant number of investors. Mutual funds promoted by Kotak Mahindra and Sundaram are able to induce only a very small fraction of investors. Preference of Mutual Funds

Axis Mutual Fund - Axis Asset… UTI Mutual Fund- 160 HDFC Mutual UTI Asset Mgmt.… 140 Fund-HDFC… 120 Franklin Templeton 100 Reliance Mutual Mutual Fund-… 80 Fund-Reliance… 60 40 Birla Sun Life 20 Kotak Mahindra 0 No of Respondents Mutual Fund-… Mutual Fund-…

DSP Black Rock Tata Mutual Fund- Mutual Fund-… Tata Asset…

ICICI Prudential SBI Mutual Fund- Mutual Fund-… SBI Funds… Sundaram Mutual Fund -Sundaram…

Fig 3.7 - Preference of Mutual funds SBI Mutual Fund manage their operations in Kerala through their seven branches, bank backed captive distribution and other intermediaries including IFA‟s (Independent financial advisors). UTI Mutual Fund manages their operations in Kerala through their five branches and other intermediaries including IFA‟s. ICICI Prudential Mutual Fund manage their operations in Kerala through their six branches, bank backed captive distribution and other intermediaries including IFA‟s. HDFC Mutual Fund manage their operations in Kerala through their three branches, bank backed captive distribution and other intermediaries including IFA‟s. Reliance Mutual Fund manages their operations in Kerala through their ten branches and other intermediaries including IFA‟s. Other Mutual Funds having three or more branches in Kerala are Birla Sun Life Mutual Fund, Tata Mutual Fund, Kotak Mahindra Mutual Fund, Sundaram Mutual Fund and Peerless Mutual Fund. All these Mutual Funds have no bank backed captive distribution network. It shows that the role of distribution network is important for the growth of Mutual fund investment in Kerala.

3.10 Preferences of Kerala Investors in Mutual Fund schemes

To satisfy the needs of Mutual fund investors, Mutual fund Schemes are designing more lucrative and innovative tools considering the appetite for risk taking of individual investors. While designing these innovative fund scheme AMCs mainly consider for risk return trade off and after completely evaluating the various securities on various risk parameters new fund scheme is launched that can satisfy the quest of every investor to maximize the returns. Present study classified the Mutual Fund Scheme based on the investment objectives. Mutual Fund Scheme preferred by Keralites shown in Table 3.10 and Fig.3.8.

Table 3.10: Number of Respondents preferred different Mutual Fund Scheme. Sl. No. Mutual fund Schemes * No of respondents Percentage of Respondents 1 Debt Schemes 294 44.25 2 Equity Schemes 398 99.50 3 Balanced schemes 32 8.00 4 Liquid Schemes 122 30.50 5 ELSS 64 16.45 6 Other Schemes 24 6.00 *Multiple responses Source: Survey data

500 450 400 Other Schemes 350 Balanced schemes 300 250 Liquid Schemes 200 Debt Schemes 150 ELSS 100 Equity Schemes 50 0 Equity Debt Hybrid Schemes Schemes schemes

Fig 3.8- Preference of Mutual fund schemes As per Table 3.10 reveals that almost all mutual fund investors surveyed prefer to invest in equity schemes .Equity funds include Growth schemes and ELSS. Equity funds are investing in equity securities and may provide regular return or capital appreciation. Growth schemes seek only capital appreciation and therefore invest in equities. Selection of equity funds may be based on various parameters ,such as their consistent performance, a stable long-term performance, concentration of a portfolio i.e. the number of sectors to which the fund has exposure, level of diversification in the portfolio and portfolio turnover ratio, i.e. the total sales or purchases of a fund (whichever is lower) divided by the average net assets of the fund. Higher the portfolio turnover ratio, greater the frequency of trading, and lower the average holding period for the stocks held in the portfolio. The market capitalisation of the stocks (large cap, small cap and mid cap) in the portfolio should be in line with the objectives of the portfolio, A high level of cash in an equity fund may imply that the fund manager is trying to time the market, liquidity, The size of the fund, measured as its net assets, may also influence the performance of a fund. The risk in the portfolio of a fund may differ based on the style used to construct the portfolio.

About 45 per cent of the mutual fund investors have expressed their interest in non equities also. While comparing the numbers related to equity and non equity funds, the investors do not have any special inclination to any of the two funds. However, only eight per cent investors prefer to invest in balanced funds which imply that the mutual fund investors prefer to enjoy the full potentials of capital market fluctuations than to stabilise their income conditions. Balanced funds are in mid-way path but failed to make investor appeal in Kerala. A significant number of investors prefer to provide liquidity of their investments.

3.11 Investor protection and regulatory mechanism of Mutual fund. The legal and regulatory framework governing the mutual fund industry includes the agencies that are involved in regulating various elements of the mutual fund industry and the specific provisions that seek the protection of investor interests. To improve the awareness investors can use the source of data published by regulators in MF. The websites of

AMFI and SEBI are sources of information that investors can use in India.

3.11.1 Securities and Exchange Board of India

The Securities and Exchange Board of India (SEBI) is entrusted with role of regulating and supervising mutual funds in India. The central piece of regulation for the mutual fund industry is the SEBI (Mutual Funds) Regulations, 1996. This regulation has been amended from time to time.

SEBI has been set up by an Act of Parliament namely the SEBI Act, 1992 and is therefore supervised by the Ministry of Finance. Appeals against any ruling of SEBI can be made to the Securities Appellate Tribunal (SAT).

Mutual funds can appoint only SEBI-registered constituents to carry out various functions for them. Constituents such as the Asset Management Company (AMC) and Trustee Company are registered with SEBI. They are therefore also subject to regulation by the Acts relevant to their constitution, such as the Companies Act and the Indian Trusts Act. Mutual funds are not directly regulated by anyone other than SEBI. But constituents can be dually regulated depending on their nature.

The website of SEBI (www.sebi.gov.in) contains the updated version of the SEBI (Mutual Fund) Regulations, 1996. It also holds all the circulars that have been issued to mutual funds, the reports of committees on mutual funds, and board papers relating to all regulated intermediaries including mutual funds. The SIDs of the funds yet to be launched by mutual funds is also available for investor feedback.

3.11.2 Association of Mutual Fund Industry

AMFI is an industry body that has been created by the AMCs are its members; they associate for the promotion of the interests of the mutual fund industry. AMFI is not an SRO but an association of the mutual fund industry. An SRO is a regulatory authority of an industry, appointed by the regulator to perform specific functions. But AMFI recommend desirable practices to SEBI, AMFI may be involved in the implementation of the code as specified by SEBI.

The website of AMFI (www.amfiindia.com) contains the latest NAV of all mutual funds, uploaded daily at the end of each business day by funds. The latest dividend announcements and fund AUM are also available. The contact information including address, phone numbers, key officials and website URLs can be found for all mutual funds. AMFI also brings out a monthly publication showing the AUM of the mutual fund industry, categorised by type of fund and category of the fund house. The AMFI website features a facility to find distributors with valid ARN in a geographical location.

3.11.3 Stock exchanges

Stock exchanges perform some of the regulatory functions as an SRO (self- regulatory organization) on behalf of SEBI. Asset Management Companies list the close ended exchange traded funds in Stock Exchange and they follow the regulatory and disclosure requirements of the stock exchange. The stock exchanges, as a primary regulator, are entrusted to act as the first level source of detecting market frauds, suspicious activities and any aberrations in the market movement; these are then reported to SEBI for further examination.

3.11.4 Reserve Bank of India

RBI is the regulatory authority of banks in India. Banks can function as sponsors, custodians and distributors of mutual funds, in discharging these functions; they are subject to regulation stipulated by RBI from time to time. RBI is the regulator of money markets and the government securities markets in India. Since mutual funds may invest in these securities (MMMF), they are required to abide by the RBI regulations as may be applicable. Mutual funds publish the rankings and ratings they receive from various agencies, along with a brief description of the methodology used. Some of these agencies (Information service providers) also award best funds in each category with awards.

The National Centre for Financial Education is setup as part of National Institute of Securities Markets (NISM), with support from all financial sector regulators i.e. Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA) and Forward Market Commission (FMC) for implementation of the National Strategy for Financial Education (NSFE).

3.12 Rights with respect to Management of the Fund

If a mutual fund desires to make a change in any fundamental attribute of a scheme, say converting a closed-end fund to an open-ended fund, or converting a sector fund into a diversified fund, such a change impacts investors in the scheme. So, a mutual fund cannot change any of its fundamental attributes without notifying the existing unit holders and giving them 30-days' notice to redeem without exit load. If two schemes of a mutual fund are merged or consolidated, it is considered a change in fundamental attribute of both the merging Scheme and the surviving scheme. However, if the following conditions are met, such merger or consolidation may not be considered as the change in fundamental attribute of the surviving scheme:

a. There are no other changes to the attributes of the surviving scheme.

b. The mutual fund is able to demonstrate that the merger or consolidation does not affect the interests of the unit holders of the surviving scheme.

Unit holders can terminate the AMC of a mutual fund by passing resolution signed by unit holders holding at least 75per cent of the total unit holding of the scheme. They can also seek to wind up the scheme.

If the trustees seek to wind up a scheme, or redeem a scheme pre maturely, they need to seek the consent of the unit holders. SEBI can also order a mutual fund to seek investor consent on any matter it decides to be of utmost importance to unit holders.

If there is a change in the sponsor or the AMC of the scheme, unit holders have the right to be notified and the right to redeem the; units without load, within a stipulated period of at least 30 days. Mutual funds are formed as trusts and the money and security that belong to the unit holders is held by the custodian. The AMC or the sponsor does not directly hold the funds or securities belonging to the investors. The custodian is independent of the sponsor. Trustees supervise the working of the mutual fund, in the interest of the investors. This structure provides a good level of protection to the investors.

Unit holders receive unit certificate and Statement of account (SoA). The unit certificate is only an acknowledgement of the number of units held by the investor. Unlike a unit certificate, the SoA is a record of all the transactions done during a given period and the current value of the holdings. Both SoA and unit certificate are not negotiable or tradable. R&T agents, on behalf of mutual funds, despatch So As to investors whenever there is a transaction on a folio. Investors are entitled to get an updated SoA, once a year, for all folios they hold with a mutual fund even if there are no transactions done on the folio.

3.13 Regulatory Developments

In relation with Overseas Regulatory Developments in Mutual funds the Securities and Exchange Board of India („SEBI‟) announced a series of measures to stimulate the mutual fund industry from 2012-13 onwards, especially distribution of mutual funds. It reenergising mutual fund industry and continued focus on investor protection, list of the regulatory amendments were announced. It includes mutual funds / asset management companies („AMC‟) to provide a separate plan for direct investments with a lower expense ratio and no commission or brokerage can be paid from such plans. SEBI permitted cash transactions in mutual fund schemes, subject to compliance with anti-money laundering rules and regulations. The SEBI directed mutual funds / AMCs to, annually, set apart at least two basis points on daily net assets within the maximum limit of total expense ratio (TER) for investor education and awareness initiatives. SEBI directed additional disclosure requirements pertaining to portfolio disclosures, financial result disclosures, etc. on mutual funds/AMCs. The SEBI allowed AMCs to charge service tax payable on investment and advisory fees to the mutual fund scheme, in addition to the maximum amount of TER. In light of the important role played by the Housing Finance Companies („HFC‟) in the housing sector, the SEBI has permitted an additional exposure not exceeding 10per cent of net assets of the debt oriented scheme for investments in HFCs. To address the issue of mis-selling, the SEBI, with effect from July 1, 2013, directed all existing schemes and all schemes to be launched on or thereafter, to be labeled considering the level of risk associated with them. The SEBI, permitted mutual funds to buy credit protection to hedge the credit risk on their investments in corporate bonds, subject to compliance with the Reserve Bank of India (RBI) guidelines on CDS-(Credit Default Swaps) and in repo for corporate bonds. The SEBI has clarified that, pending investment of funds by portfolio managers, they can deploy funds, on short term basis, in liquid mutual fund schemes. The limits applicable for investments made by QFIs (Qualified Foreign Investors) in mutual funds have been revised upwards. Pension funds and provident funds to be permitted to invest in exchange traded funds, debt mutual funds (Union Budget 2013) and asset backed securities. The universe of strategic investors in the IDF MF has been expanded to include, systemically important NBFCs registered with RBI and certain categories of Foreign Institutional Investors which are long term investors as per the norms specified by SEBI. While making a fund recommendation, the distributor must keep in mind the guidelines (advertisement code ) laid down by SEBI. The representation of schemes, past performance, ranking and awards, are all subject to these guidelines. The objective is to ensure that the advertisements are not misleading and do not create unrealistic expectations. In order to address the issue of mis-selling, Product Labeling would provide investors an easy understanding of the kind of product/scheme they are investing in and its suitability to them. It helps to reduce the problem of mis-selling, so SEBI decide to introduce „Label‟ mutual funds, with effect from July 1, 2013, on the parameters as mentioned under:

1. Nature of scheme such as to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term). 2. A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (Equity/Debt). 3. Level of risk, depicted by colour code boxes as under: Blue – Investors understand that their principal will be at low risk.

Yellow – Investors understand that their principal will be at medium risk.

Brown – Investors understand that their principal will be at high risk. The colour codes shall also be described in text beside the colour code box.

4. Scheme advertisements – placed in manner so as to be prominently visible to investors.

The selling practices adopted by the distributor should be in the interest of the investors. AMFI and fund houses have put in place a set of guidelines to be followed by the distributors. Distributors have to follow AMFI's code of ethics (ACE) AMFI's Guidelines and Norms for Intermediaries (AGNI) as well as those prescribed by the concerned AMC and SEBI.

3.13.1 Investor Grievances and Redressal

SEBI has been taking various regulatory measures to expedite the redressal of investor grievances. The grievances lodged by investors (if it is not solved by the respective company) are taken up with the respective listed company or intermediary and continuously monitored. SCORES (Sebi COmplaints REdress System) enables the investor to directly lodge the complaints online and such complaints are considered as „e-complaints‟. Grievances pertaining to stock brokers and depository participants are taken up with concerned stock exchange and depository for redressal and monitored by the concerned department through periodic reports obtained from them. Grievances pertaining to other intermediaries are taken up with them directly for redressal and continuously monitored by concerned department of SEBI. The company/intermediary is required to respond in prescribed format in the form of Action Taken Report (ATR). Upon the receipt of ATR, the status of grievances would be updated. If the response of the company/intermediary is insufficient / inadequate, follow up action is initiated. SEBI takes appropriate enforcement actions (Adjudication, 11B directions of SEBI Act 1992, Prosecution etc.) as provided under the law where progress in redressal of investor grievances is not satisfactory.

SEBI received 38,442 complaints during 2014- 15 and resolved 35,090 grievances cumulatively as Compared to 33,550 grievances received and 35,299 grievances resolved in 2013-14 (Table -3.11). The mutual fund is a trust and as its beneficiaries unit holders are not a distinct legal entity separate from the trust. They have no legal recourse to the mutual fund itself. They cannot sue themselves or the trust which is only a notional entity.

Mutual fund investments do not carry any guarantees. Sponsors of a mutual fund do not have any legal obligation to meet any shortfall in investor expectation of return, unless such a guarantee is included and specifically explained in the offer document, prospective investor is not a unit holder and does not enjoy any rights with respect to the fund, the AMC or any other constituents.

Table -3.11 Receipt and Redressal of Investor Grievances by SEBI-2000 to 2015 Cumulative Year Grievances Received Grievances Redressed Redressal Rate (%) During the During the Cumulative Cumulative Period Period 1 2 3 4 5 6 2000-01 96,913 22,42,224 85,583 21,14,085 94.3 2001-02 81,600 23,23,824 70,328 21,84,413 94.0 2002-03 37,434 23,61,258 38,972 22,23,385 94.2 2003-04 80,422 24,41,680 64,262 22,87,647 93.7 2004-05 53,409 24,95,089 53,282 23,40,929 93.8 2005-06 40,485 25,35,574 37,067 23,77,996 93.8 2006-07 26,473 25,62,047 17,899 23,95,895 93.5 2007-08 54,933 26,16,980 31,676 24,27,571 92.8 2008-09 57,580 26,74,560 75,989 25,03,560 93.6 2009-10 32,335 27,06,895 42,742 25,46,302 94.1 2010-11 56,670 27,63,565 66,552 26,12,854 94.5 2011-12 46,548 28,10,113 53,841 26,66,695 94.9 2012-13 42411 28,52,524 54,852 27,21,547 95.4 2013-14 33550 28,86,074 35,299 27,56,846 95.5 2014-15 38,442 29,24,516 35,090 27,91,936 95.5 Source: SEBI. SEBI Annual Report 2000-01 to 2014-15 Mutual funds are required to provide detailed information to investors in their offer documents and various subsequent communications. Unit holders cannot seek legal protection on the grounds of not having read, understood or noticed information disclosed to them. Fund investors are neither shareholder in the AMC nor are they depositors with the fund. Their investments cannot be protected by any of the regulators under the Companies Act. Investors can first approach the AMC and the trustees to seek redressal of any complaints relating to their investments. If their complaint is not resolved they can write to SEBI for redressal. The redressal by these entities is on best effort basis, and is not obligatory. The offer document has to disclose the details of pending investor complaints. This may form a ground for SEBI to refuse permission to a mutual fund to launch new schemes.

3.13.2 Redressal of complaints received against popular mutual funds

Table 3.12 gives a summary of complaints received against leading mutual funds in India as on 31.03.2014.These six funds were emerged out as the most preferred mutual funds for investors in Kerala, according to the survey conducted in the study.

Table 3.12 Complaints received against Mutual Funds (MFs) during 2013- 2014-which are top six mutual funds in Kerala as on 31-03-2014

Redressal of Complaints received against Mutual Funds (MFs) during 2013-2014-which are top six mutual funds in

Kerala as on 31-03-2014

TOTAL

CompLaint Code CompLaint

SBI Mutual Fund Mutual SBI Fund Mutual UTI Mutual Prudential ICICI Fund Fund Mutual HDFC Fund Mutual Reliance Fund Mutual Life Sun Birla Type of Complaint# (b) (b) (b) (b) (b) (b) (b) Non receipt of Dividend on I A Units 81 209 224 140 10 26 423 Interest on delayed payment I B of Dividend 9 6 3 4 6 5 33 Non receipt of Redemption I C Proceeds 114 280 344 248 245 81 1342 Interest on delayed payment I D of Redemption 6 11 14 20 25 92 168 II Non receipt of Statement of A Account/Unit Certificate 32 221 3 139 52 5 452 II Discrepancy in Statement of B Account 0 45 1051 984 1948 1 4032 II Data corrections in Investor C details 430 2,618 1322 3841 0 4151 12662

II Non receipt of Annual D Report/Abridged Summary 1 2 0 1 0 0 4 III Wrong switch between A Schemes 0 11 85 24 46 11 180 III Unauthorized switch B between Schemes 0 11 0 6 0 0 14 III Deviation from Scheme C attributes 0 0 0 2 0 0 2 III Wrong or excess D charges/load 0 12 0 10 0 0 22 "Non updation of changes III viz. address, PAN, bank E details, nomination, etc" 55 348 1211 213 389 1328 3544 IV Others * 158 541 63 325 241 356 1414 V SIP Related 232 0 0 0 491 0 423 Grand Total 1418 4,345 4353 6023 3453 6056 25648 Total Complaints Received 1418 4345 4353 6023 3453 6056 25648 Total Number of Folios 4114882 9554400 2644954 4508444 5463364 2019404 28345084 Percentage Complaints Against Folios 0.03% 0.05% 0.16% 0.13% 0.06% 0.30% 0.09% # - including against its authorized persons / distributors / employees etc *Non actionable - means the complaint that are incomplete / outside the scope of the Mutual Fund (b)** Number of Complaints received during the year,more than90% of complints areredressed during the year itself ,so only 10% may carry forward to next year. Secondary Data Source: AMFI-Redressal of Complaints received against Mutual Funds (MFs) during 2013- 2014

On analysing the table it came to know that most of the complaints are registered about data correction in investor details. Discrepancy in statement of account and non updation of changes were complaints next to the correction of investor details. Non receipts of redemption proceeds reported from some side along with the complaints of other nature.

While comparing the columns in the table, which reports complaints raised against various mutual fund, it is worth to mention that more number of complaints are made against the private sector mutual funds than the public sector funds. During this period maximum number of complaints registered against Birla sun life mutual fund followed by ICICI prudential and HDFC .Even though UTI mutual fund lead the sector in terms of owning customer portfolio, the rate of complaints registered against this fund in relative terms is much lower than its private sector peers. However, SBI mutual fund is found better performer in terms of successful delivery of investor service through the reduction of investor complaints. This is true both in absolute and relative terms. On clubbing these findings one can conclude that the public sector mutual funds show more efficiency in creating satisfied customer base.

3.14 Conclusion

Financial savings of Indian household sector was increased by 18.0 percent from Rs. 6,94,234 crore in 2012-13 to Rs. 8,19,450 crore in 2013-14. . It serves the purpose of financing the economic activity in India, where savings are deployed for building businesses that generate wealth, create jobs and pay taxes. So the financial assets foster economic growth and encouraged by the government over physical assets. In order to enhance the appeal of financial assets over physical assets, the government provides for regulation, disclosure of information and investor protection. Mutual funds are financial assets, the mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital and financial markets. The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings in recent years. The Indian Mutual Fund industry continues to evolve with various policy measures to preserve and maintain a safe and fair market to protect the interest of investors. Mutual Funds in India are governed by the SEBI (Mutual Fund) Regulations 1996 as amended from time to time SEBI has taken several steps to reenergize mutual fund industry to increase product penetration especially in smaller cities/towns, regulation of distributors and issues concerning investor protection, develop a long-term policy for the sustainable growth of the industry and increase household savings through mutual funds. As of at the end of March 2014, the cumulative net assets managed by all the mutual funds totalled to Rs.8,25,240 crore as against Rs.7,01,443 crore at the end of March 2013, representing a rise 17.6 percent. The business from the top five cities Mumbai, New Delhi, Bangalore, Kolkata, Chennai was average73per cent of the total assets under management and the bottom cities average was 3per cent only. So to improve the geographical reach of mutual funds, AMCs are now allowed to charge additional TER (up to 30 bps) with respect to inflows beyond top 15 cities, subject to the satisfaction of certain conditions. To increase the base of mutual fund distributors, the SEBI has permitted a new cadre of distributors which includes postal agents, retired government and semi-government officials, retired teachers, retired bank officers and other persons (such as bank correspondents) to sell units of mutual fund schemes. These channels, models and facilities available to tackle the challenges in mutual fund distribution and lead a focused approach to increase presence in Kerala.

………….………….

Chapter 4 PROBLEMS AND PROSPECTS OF MUTUAL FUND INVESTMENTS IN KERALA.

4.1 Introduction

Kerala is a small state in India blessed with good climate and abundant natural resources. The area of the state is 38863 square kilometers (38, 86,287 Ha.) which makes it the seventeenth in area amongst the states in India, accounting for 1.2 per cent of the total area of the country. Table4.1shows Geographical factors of Kerala.

Table 4.1 Geographical Factors of Kerala Geographical Factors Geographical Area 38, 86,287 Ha Percentage area of State to Area of Indian Union 1.20% Districts 14 Capital Thiruvananthapuram Thiruvananthapuram, Kochi and Airport Kozhikode (All International) Sea Port Kochi Source: Economic Review 2012 dated 31/1/2014 -State Planning Board Thiruvananthapuram, Kerala, India. Population is one of the important drivers of economic growth. It helps to determine the size of work force as well. The population of Kerala as per 2011 Census stood at 333.88 lakhs (2.76 % of population of India) comprising of 160.21 lakh (47.98%) Male population and173.67 lakhs (52.02%) Female Population. A peculiar feature of the state‟s population is that there are 1084 females for every 1000 males. Table4.2 shows Demographic factors of Kerala.

Table 4.2 Demographic Factors- Population (As Per 2011 Census)

Demographic Factors- Population (As per 2011 Census) Population 333.88 lakhs (2.76 % of population of India) Male population 160.21 lakh (47.98%) 160.21 lakh (47.98%) Female Population 173.67 lakhs (52.02%) Sex Ratio (female: male) 1084:1000 Population Below poverty line 38.06 lakhs( 11.04 % of State population) Decadal Growth rate of population 4.86 % (National level- 17.64%) Rural Population as % of total Population 52.28% (This was 74.05% as at2001) 859 persons/ Sq. Km (National Average – 382 Population Density persons/Sq. Km) Literacy Level 93.91 % (National level – 74.04%) Net Per capita income (At Current Prices as at Rs.99977/- (India – Rs.67839) 2012-13) Highest Population (2011 Census) Lowest Population ( 2011 Census) Malappuram – 41.11 lakh Wayanad – 8.17 lakh Trivandrum – 33.07 lakh Idukki – 11.07 lakh Ernakulam – 32.80 lakh Pathanamthitta – 11.96 lakh Source: Economic Review 2012 dated 31/1/2014 -State Planning Board Thiruvananthapuram, Kerala, India. There are few major industries in Kerala, but the per capita GDP is higher than the national average. Remittances from Keralites working abroad, mainly in the Middle East, makes up a large share in Kerala's Gross Domestic Product. The

GSDP in Kerala includes contribution from primary, secondary and tertiary sectors. During 2012- 13, the contribution from primary, secondary and tertiary sectors to the GSDP At current prices (2004-05) 15 per cent, 25 per cent and 60 per cent respectively

.Tertiary sector includes Transport, Storage & Communication, Trade, Hotels& Restaurants,

Banking & Insurance, Real Estate, Ownership of Dwelling & Business, Public Administration &

Defence and Other Services. Mutual Funds service include in Banking and Insurance under Tertiary sector .

4.2 Banking and Insurance products and Number of AMC Branches in Kerala. Total 50 Mutual Funds(47 in 2015) (SEBI,2015) in India ,out of these 29 AMC‟S have no branch in Kerala.21 AMC‟s opened 67 branches and 43 AMC (AMFI,2014) have distribution centers in different districts in Kerala ( Table 4.3 and Fig 4.1). Table 4.3: Average Banking &Insurance product in Lakhs &Total No.Of AMC Branches in Kerala Commercial Average Average Banking No.Of Average Per Bank Mid year Sl.no Districts in Kerala &Insurance AMC capita Income Branches in Population product in Lakhs Branches (in Rupees) Kerala ('000) 1 Trivandrum-TVM 111149 448 12 58629 3452 2 Kollam-KLM 67403 231 2 52601 2721 3 Pathanamthitta- PTA 61786 275 0 59915 1269 4 Alappuzha-ALP 74855 251 1 55618 2192 5 Kottayam-KTM 85333 324 8 64472 2052 6 Idukki-IDK 35970 112 0 59165 1170 7 Eranakulam-EKM 156516 634 19 80320 3321 8 Thrissur-TSR 115681 460 8 57853 3153 9 Palakkad-PLK 83820 281 2 52243 2795 10 Malappuram-MLP 66969 291 1 37124 4042 11 Kozhikode-KKD 85009 287 10 53685 3074 12 Wayanad-WYD 23980 81 0 44129 866 13 Kannur-KNR 73775 243 4 54675 2526 14 Kasargod-KSD 37914 135 0 47588 1305 Total 77154 4053 67 55573 2424 Source: Combiled from 1. Net district domestic product of banking & insurance (at factor cost by industry of origin) at current price-Base year 2004-05 -Government of Kerala department of economics and statistics Thiruvananthapuram Published on 22.03.2014. 2. RBI – Commercial Bank Branches Statistics-2014 3. AMFI members branches in Kerala - from AMFI web site. TVM 2000 KLM PTA 1500 ALP Average Banking 1000 &Insurance product in crores. 500 KTM No.Of AMC 0 Branches IDK

Commercial Bank KSD EKM Branches inKerala

KNR TSR WYD PLK KKD MLP

Fig. 4.1: Average Banking &Insurance product in crores &Total No.Of AMC Branches in Kerala

Net district domestic product of banking & insurance (at factor cost by industry of origin)- at current price, shows that Ernakulum District continues to have the highest income of Rs. 26.43 billion in 2012-13 as against Rs. 22.78 billion in 2011-12 registering a growth rate of slightly over 15 per cent. It is the highest Average Banking &Insurance product (Rs.15.65 Billion).The districts Thrissur Rs.11.56 billion, Thiruvananthapuram Rs. 11.11 billion Kozhikode Rs. 8.50 billion Kottayam Rs. 8.53 billion had a much higher Average Net district domestic product of banking & insurance product. 4.3 AUM by Geography - Consolidated data for MF Industry in Kerala.

The analysis of district wise AUM shows that Ernakulam district stands0.42 percentage of total India‟s AUM in 31st March 2013 with Average Net district domestic product of banking & insurance product Rs.15.65 billion. Table 4.7 reveals that the districts Ernakulam Rs. 15.65 billion, Thrissur Rs. 11.56 billion,

Thiruvananthapuram Rs. 11.11 billion Kozhikode Rs. 8.50 billion Kottayam Rs.

8.53 billion had a much higher Average Net district domestic product of banking & insurance product. As per Table 4.3 reveals that the districts Ernakulam (Cochin)0.42per cent, Thrissur 0.08per cent, Thiruvananthapuram 0.15per cent, Kozhikode 0.05per cent Kottayam-0.05per cent had a much higher percentage of total India‟s AUM in 31st March 2013.As per Average Net district domestic product of banking & insurance product and AUM by Geography - Consolidated data for MF Industry reveals that districts with higher Average Net district domestic product of banking & insurance product contribute highest percentage of total India AUM in Kerala as on 31st March 2013 . As per records of AMFI - AUM by Geography - Consolidated data for MF Industry as on 31-March-2012 to 2015 (As compared to the total Indian AUM) shown in Table 4.4,more than 75 per cent of AUM contributing districts exhibit in Fig.4.2.

Table 4.4: AUM by Geography - Consolidated data for MF Industry AUM by Geography - Consolidated data for MF Industry As on 31-Mar- As on 31-Mar- As on 31-Mar- As on 31-Mar - 2012 2013 2014 2015 Sr. AUM AUM AUM AUM Percentage Cities In Kerala No. Percentage % Percentage % Percentage % % 1 Cochin 0.49 0.42 0.38 0.41 2 Trivandrum 0.18 0.15 0.13 0.12 3 Trissur 0.12 0.08 0.10 0.09 4 Kottayam 0.07 0.05 0.06 0.06 5 Kozhikode 0.05 0.05 0.05 0.05 6 Kannur NA NA NA 0.00 Total 0.91 0.75 0.72 0.73 58721700 70144300 82524000 108275700 AUM-IN INDIA (Rs.in Lakhs) (5872.17 (7014.43 (8252.40 (10827.57 Billon) Billon) Billon) Billon) GDP-IN INDIA 839169100 938887600 1047280700 NA (Rs.in Lakhs) AUM-IN KERALA 534367.47 526082.25 594172.8 NA (Rs.in Lakhs) GDP-IN KERALA 30790606 34933832 NA NA (Rs.in Lakhs) AUM/GDP INDIA 7.00% 7.47% 7.88% NA AUM/GDP KERALA 1.74% 1.51% NA NA Source: Secondary Data Compiled from Department of Economics & Statistics Kerala, AUM by Geography - Consolidated data for MF Industry from AMFI- as on 31-March-2012 to 2015.

More than 75% of AUM contribution Districts in Kerala EKM 0.42%

KKD TVM 0.05% 0.15% AUM in… 0.05%0.08%

KTM TSR

Fig. 4.2 AUM by Geography - Consolidated data for MF Industry Source: AUM by Geography - Consolidated data for MF Industry from AMFI-2013 Penetration of Mutual Fund investment in Kerala shows an AAUM Rs.13630 Crore, with per capital income of Rs. 4,080 for November 2015 (Table 4.5). Table 4.5: Penetration of Mutual Fund in Kerala - November 2015 Per Capita* AAUM Existing Penetration Composition of AAUM November Rs.in Crore AAUM % No Of AMC Equity % Non-

Of GDP Branches Equity % Kerala Rs. 4,080 Rs.13630 3 67** 45 55

*Per capita- It is a gauge for measuring living standard, is estimated -per month at constant prices. ** http://www.amfiindia.com/amc-branches Source: AMFI (2015)

Mutual Fund wise contribution to AAUM of category of schemes for Mar- 2015 in Kerala (All figures in Rs. Crore) First Seven Mutual Funds(High AAUM in Kerala) shown in Table 4.6. Table 4.6 Mutual Fund wise contribution to AAUM of category of schemes

for Mar-2015 in Kerala (All figures in Rs. Crore)

S.no

Total

Schemes Schemes Schemes

Oriented Oriented Oriented

Overseas

Balanced Investing Investing Domestic

Territories

Other Debt Debt Other

Name the of

Traded Fund Traded Fund

States/Union

Gold Exchange Gold Exchange

Fund Funds Of Fund Funds Of

LiquidSchemes

Other ExchangeOther Growth Growth / Equity

1 SBI Mutual Fund 722.3 847.55 697.91 28.11 0 0 0.12 2295.99 20.28 2 UTI Mutual Fund 25.68 457.91 878.09 39.9 0 8.82 0 1410.4 0 ICICI Prudential 3 33.19 352.93 673.68 17.2 1.08 0.83 0 1078.91 1.8 Mutual Fund 4 Reliance Mutual Fund 106.48 221.07 632.96 9.85 0 5.73 0.47 976.56 26.06 5 HDFC Mutual Fund 43.3 207.86 546.98 102.7 0 7.78 0 908.63 4.13 Franklin Templeton 6 8.22 159.54 371.96 4.04 8.61 0 0 552.37 8.11 Mutual Fund Birla Sun Life Mutual 7 31.22 201.5 298.15 7.15 0.71 0 0 538.73 3.99 Fund Source: http://www.amfiindia.com/research-information/aum-data/classified-average-aum Even though Penetration of Mutual Fund investment in Kerala shows an AAUM Rs.13630 Crore, which is below 2 percent of AAUM in India, for November 2015. It may be not only due to the economic condition in Kerala but also the investment behaviour of Keralites. It is observed that many researchers have studied different dimensions of investment behaviour of investors. They are found out some important factors influences their risk perception, investment decisions and savings patron of investment. Economic condition in Kerala also directs various factors influencing investment decision. Those factors affecting mutual fund investment in Kerala with respect to its problems and prospects includes investment features and demographic features. Analysing these factors guide to identify the investment behaviour of Keralites.

4.4 Investors in Kerala

As financial markets are becoming increasingly complex with serious problems of information asymmetry, the need for financial literacy and education has become even more acute. But Kerala have highest literacy rate (93.91%), high enrolment rate in schools and lowest dropout rate from schools. In addition to that Kerala have one bank branch for every 5900 persons as against all India average of 11000. 74 percentage households in Kerala use banking services (Table 4.7).

Table 4.7 Household use banking services - Kerala Absolute number Percentage Total Rural Urban Total Rural Urban Total number of 77,16,370 40,95,674 36,20,696 100 100 100 households Households use banking 57,28,876 30,24,934 27,03,942 74.2 73.9 74.7 services Source: Census of India 2011 Financial Inclusion or inclusive banking is a precursor for inclusive and sustainable economic growth. Financial literacy is a prerequisite for effective financial inclusion, which will ensure that financial services reach the under banked sections of the society, leading to consumer protection through self-regulation.

Banks are now using new technologies like mobile phones to reach low income consumers. Banks should therefore be proactive about transferring this technology into an opportunity . Further, physical access to growth centers through development of a rural road network unleashes the productive capacity of the people living in rural areas and generates positive externalities. Rural roads, by themselves, can be considered a powerful instrument of financial inclusion (Lalitha, 2008) Moreover, analysis of State level data has confirmed that increased banking network and per capita income enhanced savings as well as credit inclusion. But the extent of perception and attitude of investors in the market is a sore point with the banking and financial services industry, with a large amount of savings being channelise into gold and real estate rather than the Mutual Funds.

A typical investor is unlikely to have the knowledge, skills, preference and time to keep track of events, understand their implications and act speedily. It cannot be expected for a general theory aimed at explaining how the financial markets function, to neglect how the investors, as one of the fundamental actors of the markets, make their decisions as to purchase or sell a financial asset. It can be said that the question about how people in general and investors in particular make their psychological decision processes is a subject matter of behavioral psychology (Peter, 1996).

4.5 Behaviour of Individual Investors of Kerala Investment decision is the function of a host of independent factors ranging from socio economic conditions to investor utilities. These factors determine the direction and structure where the investor should opt for an investment avenue. Investors demographic and investment profile have close relation to their preference of saving and investment in Kerala. It determines the investment objectives and the investors‟ choices. There is an association between investor category and perception towards investment avenues. However, investment choices are significantly influenced by the features of investment. It can also be influenced by macroeconomic factors, such as interest rates and expectations regarding inflation or recession. In this study, the problems of mutual fund investment mainly focus on the investors‟ attitude towards the various factors and their expectations while investing in mutual funds. This chapter using information from investors in Kerala deals with all these aspects in a detailed manner. Investment behaviour by investors in Kerala is analysed with demographic and investment profile which have close relation to the preference of saving and Investment. Perception towards investment avenues as per the Investment features defined as how the investors judge, predict, analyze and review the procedures for decision making while selecting investments. On the basis of this opinion, behaviour of individual investors of Kerala is analysed.Annexeure-1 Profile of Sample Investors. 4.6 Preference of Investment Avenues Investors were asked about the investment avenues in which they currently invest and to indicate top three of them as per the current investment amount. Table 4.8: Preference of Investment by investors in Kerala

Mutual Fund Investors Non Mutual Fund Investors Investors in Kerala Sl Investment N No of No of No of Avenue* Perc Perce Perce Responde Rank responde Rank responde Rank o ent. nt nt nts nts nts 1 Bank Deposits 125 62.5 1 164 82 1 289 72.3 1 2 Gold 123 61.5 2 146 73 2 269 67.3 2 3 Postal Savings 20 10 10 19 9.5 7 39 9.75 9 4 Insurance 25 12.5 9 24 12 5 49 12.3 8 5 Provident Fund 34 17 7 20 10 6 54 13.5 6 Real Estate 6 45 22.5 4 101 50.5 4 146 36.5 3 (Property) 7 Shares 38 19 5 14 7 8 52 13 7 8 Bonds 36 18 6 2 1 9 38 9.5 10 9 Mutual fund 121 60.5 3 0 0 10 121 30.3 5 10 Chitty 33 16.5 8 110 55 3 143 35.8 4 *Multiple response

Source: Survey data

While reading the Table 4.8 and in Fig 4.3, it is quite obvious that bank deposits are the most preferred form of investment avenue even among the mutual fund investors. More than fifty per cent of the total investor groups wish to deposit their savings with the banks in Kerala. Gold investment is much popular especially among the non mutual fund investors (73 per cent).An important point to be noted here is that lesser inclination to corporate securities by non mutual fund investors may force them to abstain from mutual fund investments which are subject to market fluctuations. But this is not true to mutual fund investors. Although, only a quarter of them preferred to invest in equity shares or bonds, almost double of that (30.3 per cent ) have found mutual funds as their favorite investment mode.

Investors in Kerala

Chitty 143 Mutual fund 121 Bonds 38 Shares 52 Real Estate 146 Investors in 54 Provident Fund Kerala Insurance 49 Postal Savings 39 Gold 269 Bank Deposits 289 0 100 200 300 400

Fig-4.3 Preference of Investment by investors in Kerala

So the mutual funds and intermediaries should take initiation to create investor awareness about the potentials of mutual fund investment and the strategies that the fund managers pursued to manage the investment risk.

4.6.1 Investor Profile and Investment Preferences: Test of Association The study previously mentioned that the investment preferences of investors are significantly related to their demographic features which include investor category, their residence region, income, age, gender and occupation. The following section at first cross tabulates the data and thereafter conducts the test of attributes using Chi square analysis. 4.6.2 Relationship between Investor Category and Preference of Investment For testing the association between investor category and their investment preferences the following hypothesis were made. H0: There is no association between type of Investor and preference of Investment.

H1: There is association between type of Investor and preference of Investment.

Table 4.8: Association between Investor Category and Preference of Investment

Investment Avenues#

Gold

Investor  -  Sig.

Category

PPF

Chitty

Bonds

Shares

Insurance

Real Estate Real

Mutual Funds Mutual

BankDeposits

Gold / E / Gold PO Savings/NSC PO

164 146 19 24 20 101 14 2 110 Non-MF 0(0) investor (82.0) (73.0) (9.5) (12.0) (10.0) (50.5) (7.0) (1.00) (55.0) 347.099 .000* 125 123 20 25 34 45 38 36 121 33 MF Investor (62.5) (61.5) (10.0) (12.5) (17.00) (22.5) (19.00) (18.0) (60.5) (16.5) #Multiple response Note: Figures in parenthesis indicate per cent. Source: Survey data *The Chi-square statistic is significant at the one per cent level.

Bank Deposits 200 Chitty Gold 150 100 Mutual fund Postal Savings 50 Non-MF investor 0 MF Investor Bonds Insurance

Provident Shares Fund Real Estate

Fig. 4. 4 Relationship of Investor Category and Preference of Investment On looking across the columns of Table 4.8 and Fig.4.4, we came to know that there is uniformity in pattern of investments by both groups. However a close observation finds divergence in the magnitude of investments over various assets. On account of this Chi square value found significant at one per cent level. Accordingly we reject the null hypothesis and can infer that the investment preferences between the two investor groups are diverging to each other. Such difference can be due to the myopic view of investors, especially which of non mutual fund group, towards the market linked investments. A well designed information efficiency seeking financial literacy program can bring significant change in this regard.

4.7 Perceived change in investment avenues given the increased savings.

Generally savings and investments are positively related as the latter is the deployment of former over different asset classes. Since the Table 4.9 has already established the statistically significant association between the savings of investors and their preferences, one can expect the change in the investor‟s choices once their income level is improved.

Investors were asked about the investment options in which they currently invest and to indicate top three of them at the current level of saving. They were also asked to identify top three investment options that will be preferred by them given their savings increased.

Table 4.9 Change investor preference under the condition of increased savings

Investors in Kerala-Preference on Investors in Kerala-Preference on Sl Investment investment with current saving. investment if increase in saving. No Avenue* No of No of Percent Rank Percent Rank respondents respondents 272 68 1 Bank Deposits 289 72.3 1 1

194 48.5 2 Gold 269 67.3 2 3

39 9.75 3 Postal Savings 39 9.75 9 10

62 15.5 4 Insurance 49 12.3 8 8

72 18 5 Provident Fund 54 13.5 6 6

124 31 6 Real Estate 146 36.5 3 5 128 32 7 Shares 52 13 7 4

65 16.25 8 Bonds 38 9.5 10 7

201 50.25 9 Mutual fund 121 30.3 5 2

43 10.75 10 Chitty 143 35.8 4 9

**Multiple response Source: Survey data Bank Deposit s 300 Chitty 250 Gold 200 Investors in Kerala- 150 Preference on investment with Mutual 100 Postal fund Savings current saving. 50 Investors in Kerala- 0 Preference on investment if increase in saving. Insuran Bonds ce

Provide Shares nt Fund

Real Estate

Fig. 5.9 Change investor preference under the condition of increased savings

Table 4.9 and Fig.5.9, compares the investment preferences at the current savings with that at the increased savings. On observing the investor responses we can find changes in the investment choices of investors at the increased savings level. More number of investors who have given much importance to relatively risk free assets like bank deposits, gold investments and post office savings earlier, are now come forward to invest in market linked assets like shares, bonds and mutual funds. An outstanding observation that the study made here is that the people who are willing to invest in mutual funds are almost doubled from the previous level. A close observation reveals that most of the potential investors to the fund investment are from Chit schemes. This finding indeed helpful to make a deduction that the investors in Kerala not preferring fund investments not simply because of their risk perception, but may be due to non availability of schemes that has a perfect match with their savings conditions. This information is highly imperative for fund managers to design their schemes in more customised form for penetrating deep in to the untapped potentials of mutual fund markets in Kerala.

Paired sample test or dependent sample t test has been administered for testing the significance of change in investor preference towards each of the asset class considered. Here we take the null hypothesis of:

Ho: µd =0 against that alternative hypothesis of µd > 0 .Here, d denotes the difference in scores by two investment preference.

The test Statistics are reported in Table 4.10

Table 4.10 Change in investor preference at the increased saving level: Paired t test results.

Investors in Kerala- Investors in Kerala- Mean Preference on Mean Preference on Mean Investments t Sig. investment with investment if increase Difference current saving. in saving. Pair 1-Bank Deposits 0.49 0.68 -.188 -6.701 0.000*

Pair 2-Gold 0.55 0.49 0.060 2.240 0.026*

Pair 3-Postal Savings 0.22 0.10 0.125 5.738 0.000*

Pair 4-Insurance 0.22 0.16 0.063 2.801 0.005*

Pair 5-Provident Fund 0.27 0.18 0.085 3.597 0.000*

Pair 6-Real Estate 0.35 0.31 0.042 1.385 0.167

Pair 7-Shares 0.18 0.32 -.140 -5.378 0.000*

Pair 8-Bonds 0.16 0.16 -.005 -.283 0.778

Pair 9-Mutual fund 0.21 0.50 -.293 -12.003 0.000*

Pair 10-Chitty 0.36 0.11 0.250 10.357 0.000*

Source: Survey data *Significant at five per cent level Thus on interpreting the results of t test, it is very clear that the change in investor preference at the increased savings conditions are statistically significant at the level prescribed. This is true in all case of investments and confirms the conclusions that we made the analysis as per Table 4.10.

Paired Samples t-test has compared the Investor preference at two savings level i.e. preference on investment with current saving and preference on investment at the increased savings level. Here the negative t value means that the mean preference on investment with current savings is higher than the mean preference on investment if there is increase in savings. The positive t value shows that the mean preference on investment at the increased savings level is higher than that at the current savings level. The preference of Mutual Fund shows positive t value i.e. Preference on Mutual Fund will increase when saving increases. Investment in chitty shows negative t value, so preference on chitty will reduce even though saving increases. Paired Samples t-test results reported in the Table 5.10 also agree with the significance of difference among the change in investor preference at the increased saving level.

4.8 Investor‟s priorities over investment features of Mutual fund. Investment portfolio building pre demands the assessment of return, risk and liquidity associated with each of the investment options by investors. Once the investors successfully complete, the process then only can easily develop the portfolios of different types which can fulfill their requirements. Portfolio development mainly involves finding how much proportion of the disposable income should be invested into different investment options so that it can give required return at required time with the lowest possible risk. An investor's interaction with a mutual fund begins with the initial purchase or investment and end with redeem the investment. Mutual funds enable such interaction by providing various services to investors. Minimizing risk (ensuring safety) and maximizing return are the two basic criteria that are given highest weightage while designing services specifications as a rational investor. Investor‟s knowledge about capital market volatility and AMCs ability to control risk involved in mutual funds plays a dominating role in determining their satisfaction level. The variation in response of investors with respect to investment features in ten investment option (Table 5.14 of previous chapter) shows the variation of investor‟s perception towards various investment avenues. One of the big challenges in the Kerala context has been the weaning of the household from real assets such as gold and real estate, both of which are used as insurance and investment vehicles, towards formal sector finance. The dissimilarity in responses of investors towards various investment avenues leads to analyse whether such perceptual difference prevailing in Mutual fund investment also. In order to measure the investor‟s priorities over investment features of Mutual fund, six investment features, such as safety, liquidity, return, tax saving, Govt. regulation and service are considered and these variables were measured on a five point Likert-type scale ranging from „least requirement‟ to „most requirement‟. The investors are asked to respond in terms of their expectation from fund investment. Here t test is used to compare the means of Mutual Fund Investors and Non Mutual Fund Investors perception towards the priorities of investment features H0:µ1=µ2

H1: Two means are not equal i.e. µ1≠µ2 Table 4.12 Investor‟s expectation about investment features of Mutual fund. Mean Score Sl.No. Investment features t Sig. (2-tailed) MFI NMFI 1 SAFETY 2.78 3.45 -5.096 .000* 2 LIQUIDITY 2.84 2.80 .245 .807 3 RETURN 3.51 2.86 4.806 .000* 4 TAX SAVING 2.78 2.86 .610 .542 5 GOVT.REGULATION 2.80 3.16 -2.734 .007* 6 SERVICE 3.45 2.72 5.622 .000* *Significant at one per cent level. Source: Survey data

The result in Table 4.12 shows the average perception on various features needed in mutual fund investment or requirements i.e. Safety, Liquidity, Return, Tax saving, Govt. regulation and Service. Tables 4.12 compare the mean expectation score of MFIs and NMFIs about the various investment features of mutual funds. When MFIs expect more returns and better investor service from the prospective fund schemes, NMFIs demand more safety and government regulations. Since most of the fund schemes are liquid in nature, both of the investor groups do not expect further improvement in this regard. Independent sample t test is used to find the statistical significance of difference between the mean perception score of the two investor groups. Since the p value in all these cases are less than one per cent, the assumed level of significance, the hypothesis for equality in the mean rating on safety, return, Govt. regulation and service are rejected in favour of the alternative hypothesis that the requirement of these factors in Mutual fund investment by both investment groups are not equal. Thus, the test result provide the statistical evidence (at one percent level of significance) for the difference of opinion between two investor groups regarding the factors like safety, return, government regulation and investor services. NMFI group has the feeling that strict regulations from the part of regulatory body can ensure safety for mutual fund investment which can be a driving force for him to be a part of mutual fund investment market in future. 4.9 Investors perception towards problems in Mutual fund investment

The investors are asked to rate the problems perceived by them at five points scale from „least considered‟ to „most considered‟. The assigned scores on these scales are from 1 to 5 respectively. The mean score of the problems among the NMFI and MFI have been computed to exhibit their important problems among them. Regarding their problems, the significance of differences among the MFI and NMFI has been verified with the help of independent sample t test. The resulted mean score of the various problems is presented in Table 4.13.The investors attitude on the above said variables have been analysed with the help of its mean scores among the MFI and NMFI separately. It exhibit the importance of the variables involved in problems among investors regarding Mutual fund investment decision function. Table 4.13. Investors perception towards problems in Mutual fund investment

Mean Score Sig. (2- S.No. Perspective problems in Mutual Fund Distribution t tailed) MFI NMFI

3.43 3.58 1.133 0.258 1 Time consuming process in Mutual fund distribution 2.42 3.34 4.890 0.000 2 Inferior Investment Plans 2.84 3.44 4.642 0.000 3 Lack of Good regulatory mechanism 3.41 2.93 -3.520 0.000 4 Misleading advice from Mutual fund distributors 3.36 3.46 0.838 0.403 5 Cost /expenses charged by Mutual funds 3.42 2.94 -3.321 0.001 6 Problems in distribution Technology 3.38 2.84 -3.420 0.000 4 Information provided by distributors is not clear. 2.4 3.33 5.016 0.000 8 Investment Term 3.35 2.86 -3.691 0.000 9 Better service from other NBFC distributors 2.94 3.45 3.444 0.000 10 Less Liquidity 2.85 2.90 0.382 0.403 11 New and private sector mutual funds are not safe 2.86 3.45 4.490 0.000 12 High risk 3.43 Mutual funds are not able to satisfy the investors’ 3.29 -1.144 0.253 13 confidence in distributors 3.34 2.81 -3.841 0.000 14 Lack of assistance in mutual fund transaction 3.44 3.56 0.418 0.443 15 Inefficient fund Managers Source: Survey data While comparing the mean score indicating the problems perceived by MFIs and NMFIs with regard to mutual fund investments more divergence than convergence among investors are quite evident .MFIs faced some problems at aggravate level which include time taken in fund distribution, misleading advice from mutual fund distributors, incidental cost and expenses charged, abstract information from the distributors and poor services from distributors compared to other NBFCs. NMFI have apprehension about the time consuming process in fund distribution , the cost and expenses charged, fail to win investor confidence and inefficient fund management. They have showed their reluctance to invest because of inferior investment plans, absence of good regulatory mechanism, inappropriate investment term, less chance for recovery of investment amount without loss and high risk associated with the fund investments. Based on the facts, it appears that investors have distinct problems with mutual fund investments. When MFIs expected problems mainly associated with fund distribution, NMFIs, who can be potential investors perceive the inefficient investment plan, lack of protection and high risk element as the problems connected with mutual fund investment.

4.10 Prospects of Mutual Fund Investments in Kerala

Mutual funds offer varied benefits to investors through professional and sound fund management. Thus mutual funds reduce the risk and yield comparatively high rate of return. Investments in mutual fund are also being depended on many environmental factors. There should be an environment conducive for the growth of capital market investors in a country. More over many of the potential investors expect better service from the funds once they go for investment. They will have certain expectation on different dimensions of fund performance which might be satisfied at the real market place. Once mutual fund companies have identified the investor expectations and decided to perform according to the level of expectation, then they should analyse the prospects for the growth of the fund. The prospects will be indirectly analysed by examining the proportion of non mutual fund investors, i.e. potential investors who are ready to become mutual fund investors once their requirements are promised to be satisfied by the fund managers.

4.10.1 Prospective features in Mutual Fund Investment Prospective features in Mutual Fund investment are the expectations that motivate the investor to prefer the mutual fund investments. It is analysed with the help of exploratory factor analysis. The score of all the 15 features given by the investors have been included for the factor analysis. The ultimate aim of the factor analysis is to identify the key factors influencing the prospects of mutual Fund investment or fund selection behaviour. 4.10.2 Factors influencing the prospects of mutual Fund Investment The factors considered for selecting mutual funds are narrated with the help of factor analysis. The Mutual Fund attributes were measured through a five point Likert-type scale ranging from „low expectation‟ to „high expectation‟. The identified 15 prospective features in Mutual Fund affecting selection of mutual fund schemes are analysed using Principal Component Analysis, with the objective to identify the factors influencing the prospects of mutual fund investment. Before conducting the factor analysis, Kaiser-Meyer-Olkin test and Bartlett's Test of Sphericity measure of sampling adequacy were used to examine the appropriateness of factor analysis. The approximate chi-square statistic for the Bartlett's Test of Sphericity is 6454.588 with 105 degrees of freedom, which is significant at five per cent level (Table-4.14). The KMO statistic (0.495) is also significantly large (>0.5). Hence, factor analysis is considered as an appropriate technique for further analysis of data. Table 4.14: KMO and Bartlett's Test of Sphericity Bartlett's Test of Kaiser-Meyer-Olkin Sphericity Measure of Sampling p value (Approx. Chi-Square Adequacy. value) 0.483 4244.319 0.000* *Significant at one per cent level Source: Survey data Table 4.15 gives the total variance contributed by each component with Eigen values. The factor frame work retain only factors with Eigen values greater than one and other factors are not included in this model. It is possible to select weights or factor coefficients so that first factor explains the largest portion of total variance i.e.46.026.Accordingly five factors were emerged out on the base of variance. The first factor accounts for 34.24 per cent of the total variance followed by 14.49 per cent by second factor. The remaining three factors were contributed to the total variance almost at same scale or at 4 to 8 per cent. An important out put from the factor analysis is the factor matrix also called the factor pattern matrix. The factor matrix contains the coefficients used to express the standardised variables in terms of factors. The factor matrix formed for the analysis is Table 4.16 which explains the main factors, explaining the selection of mutual fund products in future according to perspective of investors in Kerala. From the table it is very clear that Factor 1 has high coefficients for variables one to three. This factor may be labeled as “fund promotion”. Factor 2 is highly related with variables four to seven and the same may be labeled as “role of regulators.” Factor 3 is positively closed with four variables which we called as “service of mutual funds”. The last two factors, Factor 4 and Factor 5 constituted by two variables each and they can be named as “fund performance” and “fund quality” respectively. The detailed explanation of all the five factors are given in the succeeding paragraphs. Table 4.15: Total Variance Explained Total Variance Explained

Extraction Sums of Squared Rotation Sums of Squared Initial Eigenvalues Loadings Loadings Component % of % of Cumulat Cumula % of Cumulativ Total Varian Total Varian Total ive % tive % Variance e % ce ce 1- Fund Promotion 5.412 38.080 38.080 5.412 38.080 38.080 3.441 23.139 23.139

2- Role of Regulators 2.608 14.384 55.464 2.608 14.384 55.464 2.444 16.311 39.450

3-Service of mutual 1.319 8.496 64.263 1.319 8.496 64.263 2.352 15.681 55.131 funds

4-Fund performance 1.245 8.300 42.563 1.245 8.300 42.563 2.302 15.349 40.480

5- Fund quality 1.012 6.444 49.304 1.012 6.444 49.304 1.324 8.824 49.304

6 .444 5.144 84.484 4 .502 3.345 84.829 8 .432 2.882 90.411 9 .325 2.165 92.846 10 .244 1.830 94.405 11 .252 1.683 96.389 12 .229 1.529 94.918 13 .148 .990 98.904 14 .099 .662 99.569

15 .065 .431 100.000 Extraction Method: Principal Component Analysis. Source: Survey data 4.10.2.1 Fund Promotion These are the minimum requirements that are required in a mutual fund to prevent the investor from being dissatisfied. They do not necessarily cause satisfaction but lead to dissatisfaction if absent. These are those factors that lead to the fulfillment of the basic requirement for MF investment. Thus, they have a low influence on selection of mutual fund products even though they are a prerequisite for selection of mutual funds. This factor comprise of three variables- promotional measures by Government, investment option suitable for modern economy and use of modern methods/ techniques in investments.

Table 4.16- Key factors influencing selection of mutual fund products Investors’ expectations in MF investment Component 1 2 3 4 5 Fund Promotion

4 Role in Service from brokers, financial advisors/agents .916

5 Role in Product information .910

6 Role in Mutual fund transaction . .452

Facility of various modes for payment- Service for Mutual fund 7 .634 Transaction. Role of Regulators

8 Investment protection measures by Government. .834

9 It is an investment option suitable for modern economy. .442

10 Service for investor grievance .688

11 Role in investor Complaints .613

Service of mutual funds 1 Mutual funds Advisory service in local language- Advisory service .455 Direct and Technology enabled service for frequent 2 .416 communication/information - Information Service 3 Mutual Funds helps to use modern technology in investments .636 Fund performance

12 Long term investment in MF reduce risk- High risk high profit .821

Older mutual funds provide stable return &Public sector mutual 13 .882 funds are safe. Fund quality

14 Investment distribution channels (e.g. Banks) .951

15 Professional fund management .629

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 8 iterations. Source: Survey data 4.10.2.2 Role of Regulators These are the factors that lead to satisfaction if fulfilled and can lead to dissatisfaction if not fulfilled. These include regulations in expert advice and service from brokers‟ financial advisors/agents, product information, facilities for various investment plans such as SIP, STP, SWP and Switches and in investor Complaints. 4.10.2.3 Service provided by Mutual funds These are the factors that lead to satisfaction if fulfilled and can lead to dissatisfaction if not fulfilled. These include Mutual funds advisory service in local language, direct and technology enabled service, frequent communication/ information, service for investor grievance, Facility of various modes for payment. 4.10.2.4 Fund performance These are factors that increase the selection of mutual fund products if fulfilled but does not cause dissatisfaction if not fulfilled. This include, long term investment in Mutual fund, older mutual funds provide stable return & public sector mutual funds are safe. 4.10.2.5 Fund quality These are the factors that lead to satisfaction if fulfilled and can lead to dissatisfaction if not fulfilled. These include investor protection through good regulatory mechanism, Experience and professionalism of MF managers.

4.11 Prospects of Mutual Fund investment-Discriminant analysis. The prospects of Mutual Fund investment in Kerala analysed through Investors expectations in MF investment using factor loadings computed under exploratory factor frame work. Once we identified the factors determining the prospects of mutual fund investment, we should begin to find out the predictor variables that are relatively better in discriminating the two investor groups, MFIs and NMFIs, to classify an investor in to one of the two groups by a decision rule. Accordingly using the same factor loadings extracted under exploratory factor frame work as data inputs, a discriminant analysis model was framed out to find out how do investors who have preference to mutual fund investment differ from those who have not. In fact the analysis plan to estimate the percentage of investors correctly classified as MFIs and NMFIs. The discriminant analysis model involves linear combinations of the following form.

D =b0+b1X1+b2X2+b3X3+……….bk nk Where D= Discriminant score bs= Discriminant Coefficients Xs=predictor or independent variable. Discriminant analysis is used to predict group membership. The basic principle underlying a discriminant model is to choose linear combinations of the predictor variables that will maximise between group variance to within group variance. It is a technique for analysing data when the criterion or dependent variable is categorical and the predictor is or independent variables are metric. Infact the linear contribution of predictor variables discriminate between the categories of the dependent variables. As the two investor groups, the dependent variables are in categorical form they are to be compared on the basis of the loadings of five factors that are predictor variables in metric form. Fund promotion, role of regulators, service of mutual funds, fund performance and fund quality are the predictor variables in the model. However to know in which of the factors the two investor group differentiate significantly, univariate F ratios has been computed. The values of F statistics are presented in Table 4.17. Table 4.17: Tests of Equality of Group Means- With factor scoring Tests of Equality of Group Means S.L.No. Wilks' Prospective factors F df1 df2 Sig. Lambda 1 Fund Promotion 1.000 0.001 1 398 0.942 2 Role of Regulators 0.991 3.668 1 398 0.056 3 Service provided by Mutual Funds 0.968 13.364 1 398 0.000* 4 Fund Performance 0.936 24.269 1 398 0.000* 5 Fund Quality 0.960 16.545 1 398 0.000* *At one per cent level Source: Survey data It is observed from the table that the significant difference exists in the variables of Role of Regulators, Service provided by Mutual Funds, Fund Performance and Fund Quality at one per cent level. 4.11.1 Canonical Discriminant Functions The significance of the univariate F ratios indicating that when the predictors are considered individually, all these factors significantly differentiate those who invested in mutual funds and those who did not. The basic principle in the estimation of a discriminant function is that the variance between the groups relative to the variance within the group should be maximized. The ratio of between group variance to within group variance is given by Eigen values. Key factors influencing selection of mutual fund investment is used as predictor variable in estimating discriminant function. Table 4.18: Eigen values - With factor scoring Eigen values % of Cumulative Canonical Function Eigen value Variance % Correlation 1 .442a 100.0 100.0 .646 a. First 1 canonical discriminant functions were used in the analysis. Source: Survey data As per the Table 4.18 the Eigen value is 0.445 with 100 per cent variance explained. The Canonical Correlation is 0.656, which is the simple correlation coefficient between the discriminant score and their corresponding group membership (MFI / NMFI).The square of the canonical correlation is (0.656)2 =0.430, which means 43 per cent of variance in the discriminating model between a prospective MFI / NMFI is due to the change in the predictor variables in the model. The group centroids, i.e. the mean discriminant score of the MFI/NMFI group‟s separately, are presented in Table 4.19. Table 4.19: Functions at Group Centroids - With factor scoring Functions at Group Centroids Function Investor Category 1 NMFI -.412 MFI .412 Unstandardized canonical discriminant functions evaluated at group means Source: Survey data As per Table 4.19 Functions at Group Centroids works out to be -0.392 for a non mutual fund investor and 0.392 for a mutual fund investor .It can be used for designing a decision rule to classify an investor into the mutual fund investor/ non mutual fund investor category. The cut –off score used for classification into the mutual fund investor/ non mutual fund investor category can be obtained by taking the average of the two group centroids. The average works out to be (- 0.392+0.392)/2=0. Now any investor whose discriminant score is greater than zero would be classified as a prospective mutual fund investor, whereas the one with score less than zero would be classified as a non mutual fund investor. Therefore, it may be inferred that a high score on Role of Regulators, Service provided by Mutual Funds, Fund Performance and Fund Quality is likely to classify a respondent into the mutual fund investor group. Table 4.20: Wilks' Lambda - With factor scoring Wilks' Lambda Test of Function(s) Wilks' Lambda Chi-square Sig. 1 .346 62.291 .000* *Significant at one per cent level Source: Survey data Wilks‟ lambda is the product of the univariate lambda for each function, computed by finding the ratio of within –group sum of squares to total sum of squarer‟s in a one way ANOVA where the dependent variable is the discriminant score for each respondent and the predictor variable is the category (one or zero) to which the respondent belongs. The value of Wilks‟ lambda is 0.356.The Wilks‟ lambda takes a value between 0 and 1 and lower the value of Wilks‟ lambda, the higher is the significance of the discriminant function. The statistical test of significance for Wilks‟ lambda is carried out with the chi-squared transformed statistic, which is 115.236 (Table 4.20) at a p value of 0.000.Since the p value is significant at one per cent level, it is inferred that the discriminant function is significant.

Table 4.21: Standardized Canonical Discriminant Function Coefficients - With factor scoring

Standardised Canonical Discriminant Function Coefficients S.L.No. Prospective factors Function 1 Fund Promotion 0.005 2 Role of Regulators 0.240 3 Service provided by Mutual Funds 0.502 4 Fund Performance -0.694 5 Fund Quality 0.555 Source: Survey data. Standardized Canonical Discriminant Function Coefficients helps to interpret the discriminant coefficient exactly in the same way as a regression coefficient. A small value of the discriminant coefficient means that the impact of a unit change in a predictor variable is small in the discriminant function score. The coefficients of standardized discriminant function are independent of the units of measurements. The absolute values of the coefficients in standardized discriminant function indicate the relative contribution of the variables in discriminating between the two groups. Table 4.21 gives the standardized canonical discriminant function coefficients. It indicates that Fund Quality is the most important factor, which discriminates between the MF investor and Non Mutual Fund Investor group, followed by Service Provided by Mutual Funds, Role of Regulators, Fund Promotion and Fund performance.

Another way of finding the relative contributions of the predictor variables in discriminating between the MF investor and Non Mutual Fund Investor group is through comparing the structural coefficients of the predictor variables (Table 4.22).

Table 4.22: Structure Matrix- With factor scoring Structure Matrix S.L.No. Prospective factors Function 1 Fund Performance -.634 2 Fund Quality .494 3 Service provided by Mutual Funds .444 4 Role of Regulators .232 5 Fund Promotion .004 Pooled within-groups correlations between discriminating variables and standardized canonical discriminant functions Variables ordered by absolute size of correlation within function Source: Survey data The structural coefficients are obtained by computing the correlation between the discriminant score and each of the independent variables. These are also called discriminant loadings. Table 4.22 the correlation coefficient between the discriminant score and the variable Fund Quality is 0.590, whereas the correlation with Service Provided by Mutual Funds, Role of Regulators, Fund Promotion and Fund Fund Performance is 0.434,0.300 ,0.014 and -0.520 respectively. Fund Protection remains the most important characteristic using Standardized Canonical Discriminant Function Coefficients and Structure Matrix. The classification accuracy can be assessed through Hit ratio and cross – validation method. Table 4.23 classifies each respondent in to the Mutual Fund Investor and Non Mutual Fund Investor category. This table is also called confusion matrix or classificatory table. Table 4.23: Classification Results a, c - With factor scoring Classification Results a,c Predicted Group Investor Category Membership Total NMFI MFI NMFI 128 42 200 No of respondents MFI 59 141 200 Original NMFI 64.0 36.0 100.0 % MFI 29.5 40.5 100.0 NMFI 122 48 200 No of respondents MFI 63 134 200 Cross-validated NMFI 61.0 39.0 100.0 % MFI 31.5 68.5 100.0 a. 64.3% of original grouped cases correctly classified. b. Cross validation is done only for those cases in the analysis. In cross validation, each case is classified by the functions derived from all cases other than that case. c. 64.8% of cross-validated grouped cases correctly classified. Source: Survey data

As per Table 4.23, that out of the 400 respondents who were actually prospective mutual fund investors, 283 were predicted by the model as MFI. Similarly, out of the 400 respondents that were actually NMFI, 249 of them were predicted as non mutual fund investor. The overall classificatory ability of the model measured by the hit ratio is given as: no of correct predictions Hit ratio total number of cases

X100 =64.3 per cent 4 Thus, 66.5 per cent of original grouped cases correctly classified. As per cross validation, each case is classified by the functions derived from all cases other than that case. Cross validation is done only for those cases in the analysis (leave one out classification).As per Table 4.23, 64.8 per cent of cross-validated grouped cases correctly classified. So there are increased chances for more number of NMFIs to be part of Mutual Fund market in Kerala provided the overall performance of the Funds at par with the level expected by the investors.

4.12 Conclusion This chapter discussed about the problems of mutual fund investments from the perspectives of investors in Kerala. Using five point Likert Scale the study collected responses regarding three dimensions of financial service industry- Investor perception towards mutual fund investments, the role of intermediaries in delivering services to investors and services rendered by mutual funds. The study found that the existing mutual fund investors in Kerala demand increased return and better investor services for their utility maximization in investment function. Non mutual fund investors still found the mutual fund investments as highly risky investments and its investor protection measures are not adequate. Fund distribution is remained as a problem even to mutual fund investors of the state. A good investment plan with customised and innovative features is highly essential for the fund investments to penetrate deep in to the market. Priorities should be given to the improvement in information services and grievance redressal services rendered by mutual funds. The distribution network of the fund at present is urban centered in Kerala, which should be expanded to rural Kerala also. The prospects of Mutual fund investments in Kerala were analysed from the investors point of view .The exploratory factor analysis administrated was able to identify five important areas: Fund promotion, Role of regulators, Service of mutual funds, Fund performance and Fund quality, where the mutual fund market should make better their performance for expanding its investor base .However difference exist in level of expectation of the present and potential investors. Canonical discrimination function was successfully discriminated the two investor groups at a greater scale with its lower Wilks lambda value. Fund quality is the most important factor where the rate of discrimination was high followed by mutual fund services and regulators roles. Innovative products with fewer risk, speed and efficient grievance redressal together with imparting professionalism in investor services definitely can find good market for mutual fund instruments in Kerala given the buoyant capital market conditions of India.

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Chapter 5 Summary, Findings and Suggestions 5.1 Introduction

The heterogeneity amongst investors in terms of their perception preferences and investment behaviour can be significant in identifying the problems and prospects of mutual fund investment. Hence, the present study attempts to analyse the investor behaviour and perception for assessing the potentials of mutual fund investment in Kerala context.

This study is descriptive as well as exploratory in nature. The study primarily based on the survey data collected from 400 sample individual investors in Kerala through a self –administered questionnaire. Most of the qualitative variables used in the study were measured on Likert type scaling techniques. Individual investors in Kerala constitute the universe or population in this study. To study the problems and prospects of Mutual fund investment Kerala, the opinions of both Mutual Fund Investors (MFI) and Non Mutual Fund Investors (NMFI), are considered. MFIs are investors who are living in Kerala and invested in mutual fund schemes. NMFIs are investors who have not so far invested in mutual funds but likely to invest in mutual funds in future.

The final sampling units of 200 MFIs were selected from the list provided by AMCs‟ and was based on judgment sampling method. The sample of 200 NMFI was selected using systematic random technique. The analytical methodology covered wide range of statistical tools of parametric or non parametric nature. Chi square analysis as a test of association of attributes has been extensively used in this study. Independent sample t test verified the statistical significance of differences in mean perception score of MFIs and NMFIs towards various aspects of their investment programmes. Paired t test examined whether there was any significant changes in investor preference at the increased savings levels. Exploratory factor analysis was employed to reduce the number of variables/statements representing various problems/prospective features of mutual fund investments. Again using the same factor loading canonical discriminant analysis predict the investment features in the order of their priority which possibly included in the mutual fund innovation in future for canvassing more number of investors from NMFI group to MFI group.

The prime objectives of the study include:

1. To identify the regulatory mechanism of Mutual fund.

2. To examine the public and private sector institutional participation.

3. To assess the investor behaviour and mutual help of investors and experts in Mutual Fund Investment.

4. To study the extent of responsibility on the part of Mutual fund financial institutions in the reduction of investor grievances.

5. To evaluate the service provided by Mutual fund financial institutions in Kerala.

5.2 Regulatory mechanism of Mutual Fund

The legal and regulatory framework governing the mutual fund industry includes the agencies that are involved in regulating various elements of the mutual fund industry and the specific provisions that seek the protection of investor interests. To improve the awareness investors can use the source of data published by regulators in MF. The websites of AMFI and SEBI are sources of information that investors can use in India.

The mean expectation score of MFIs and NMFIs about the various investment features of mutual funds have compared. When MFIs expect more returns and better investor service from the prospective fund schemes, NMFIs demand more safety and government regulations. Independent sample t test results provide the statistical evidence (at one percent level of significance) for the difference of opinion between two investor groups regarding the factors like safety, return, government regulation and investor services. NMFI group has the feeling that strict regulations from the part of regulatory body can ensure safety for mutual fund investment.

5.3 Public and Private Sector Institutional Participation

At the end of March 2015 the private sector mutual funds retained the dominant place in the mutual fund industry with Rs. 917762 Crore Asset under Management, and in Public sector mutual fund holds Rs. 164995 Crore Assets Under Management.But Individual investors (50.2%) prefer to invest in public sector sponsored mutual funds.

5.4 Investor Behaviour in Kerala

Bank deposits are the most preferred form of Investment Avenue even among the mutual fund investors. More than fifty per cent of the total investor groups wish to deposit their savings with the banks in Kerala. Gold investment is much popular especially among the non mutual fund investors (73 per cent). Lesser inclination to corporate securities by non mutual fund investors may force them to abstain from mutual fund investments which are subject to market fluctuations. A well designed information efficiency seeking financial literacy program can bring significant change in this regard. These observations are statistically proved by the result of Chi square analysis.

On comparing the investment preferences at the current savings with that at the increased savings, we can find changes in the investment choices of investors at the increased savings level. More number of investors who have given much importance to relatively risk free assets like bank deposits, gold investments and post office savings earlier, are now come forward to invest in market linked assets like shares, bonds and mutual funds. Most of the potential investors to the fund investment are from Chit schemes. This finding indeed helpful to make a deduction that the investors in Kerala not preferring fund investments not simply because of their risk perception, but may be due to non availability of schemes that has a perfect match with their savings conditions. Paired Samples t-test results reported also agree with the significance difference among the change in investor preference at the increased saving level.

The mean expectation score of MFIs and NMFIs about the various investment features of mutual funds have compared. When MFIs expect more returns and better investor service from the prospective fund schemes, NMFIs demand more safety and government regulations. NMFI group has the feeling that strict regulations from the part of regulatory body can ensure safety for mutual fund investment.

5.5 Problems of Mutual Funds

The problems faced by MFIs include Selection of mutual funds,Seletion of mutual fund schemes, misleading advice from mutual fund distributors, incidental cost and expenses charged and poor services from distributors compared to other NBFCs.To solve or reduce these problems are the responsibility of Mutual Funds. NMFI have apprehension about the time consuming process in fund distribution and the cost and expenses charged. Moreover they perceive the inefficient investment plan, lack of protection and high risk element as the problems connected with mutual fund investment.

The problems related to mutual fund products are misleading advice from Mutual fund distributors, Better service from chit fund /other NBFC distributors in Kerala, financial sophistication about Mutual fund, Problems in Technology based service from Mutual Funds. Mutual Funds are not able to satisfy the investors‟ expectations by maintaining credibility and confidence, avoiding delay in Mutual fund distribution and adequate assistance in mutual fund transaction. The significant difference among the MFI and NMFI have been identified in the case of variables namely advice, service, information, technology and transaction. For the two variables, time consuming process in fund distribution and failure of distributors to win confidence of investors, there were no statistically significant difference in mean perception score between two investor groups.

Cost /expenses charged by Mutual funds , High risk(Lack of safety), Less Liquidity, Lack of Good regulatory mechanism, Inefficient fund Managers are considered to be important by investors for making Mutual fund investment in Kerala. Both MFIs and NMFIs have the same opinion that cost /expense charged by the funds are high and the fund management in most firms is not much efficient.

Investment Term, Investment Plan, and new and private sector mutual funds are not safe. The significant difference among the MFI and NMFI have been identified in the case of variables namely Investment Term and Investment Plan, where non mutual fund investors perceived the problem at higher level than mutual fund investors. Sound investment plan together with an investment term tailored to investor needs can overcome this issue.

5.6 Services for Mutual fund investment

Existing mutual fund investors give more weightage to information service and investor grievance services. In fact advisory service and service for mutual fund transaction are perceived at the same scale by both group of investors and the same is measured at average rate. From the independent sample test results also, it is much clear that investor differences exist in priorities for information and grievance service by mutual funds in Kerala.

The services of intermediary at different roles are perceived relatively at high level by mutual fund investors and their perceptions are almost evenly distributed. Non mutual fund investors contradict with the response of mutual fund investors in two areas advisory service and mutual fund transaction and the same is statistically significant.

The study also examined the expectation of investors regarding the various dimensions of mutual fund investments. The prospective features in Mutual Fund affecting selection of mutual fund schemes are analysed using Principal Component Analysis, with the objective to identify the factors influencing the prospects of mutual fund investment. The KMO statistic (0.483) found is also significantly large (>0.5). Hence, factor analysis as an appropriate technique for further analysis of data.

Exploratory factor frame work has identified the five factors as the prime area in which the mutual fund should exhibit superior performance. They include fund promotion, role of regulators, service of mutual funds, fund performance and fund quality.

Fund promotion is the minimum requirements that are required in a mutual fund to prevent the investor from being dissatisfied. They have a low influence on selection of mutual fund products even though they are a prerequisite for selection of mutual funds.

Role of regulators are the factors that lead to satisfaction if fulfilled and can lead to dissatisfaction if not fulfilled. These include, Investment protection measures by Government, investment option suitable for modern economy , Service for investor grievance , Role in investor Complaints .

Service provided by Mutual funds include Mutual funds advisory service in local language, direct and technology enabled service, frequent communication/information, Mutual Funds helps to use modern technology in investments

Fund performance include, long term investment in Mutual fund, older mutual funds provide stable return & public sector mutual funds are safe.

Fund quality includes good distribution channels (e.g. Banks), Experience and professionalism of mutual fund managers.

The study has identified the factors determining the prospects of mutual fund investment and find out the predictor variables that are relatively better in discriminating the two investor groups, using the same factor loadings extracted under exploratory factor frame work as data inputs, a discriminant analysis model was framed out to find out how do investors who have preference to mutual fund investment differ from those who have not. As the two investor groups, the dependent variables are in categorical form they are to be compared on the basis of the loadings of five factors that are predictor variables in metric form. Fund promotion, role of regulators, service of mutual funds, fund performance and fund quality are the predictor variables in the model. Univariate F ratio found the significant difference exists in the variables of Role of regulators, Service provided by Mutual Funds, Fund Performance and Fund Quality at one per cent level. The Canonical Correlation is 0.646, which is the simple correlation coefficient between the discriminant score and their corresponding group membership which indicates that significant amount of variance in the discriminating model between a prospective MF investor/Non Mutual Fund Investor is due to the change in the predictor variables in the model. Functions at Group Centroids work out to be -0.412 for a Non Mutual Fund Investor and 0.412 for a mutual fund investor. It is inferred that a high score on Role of regulators, Service provided by Mutual Funds, Fund Performance and Fund Quality is likely to classify a respondent into the mutual fund investor group. Lower value of Wilks‟ lambda (0.346) indicates the significance of the discriminant function at higher level. The statistical test of significance for Wilks‟ lambda found the discriminant function is significant at one per cent level.

The standardized canonical discriminant function coefficients indicates that Fund Quality is the most important factor, which discriminates between the MF investor and Non Mutual Fund Investor group, followed by Service Provided by Mutual Funds, Role of regulators, Fund Promotion and Fund performance. Fund Protection or quality remains the most important characteristic using Structure Matrix also. The overall classificatory ability of the model measured by the hit ratio is 67.3 per cent and 64.8 per cent of cross-validated grouped cases correctly classified. These findings imply that there are increased chances for more number of NMFIs to be part of Mutual Fund market in Kerala provided the overall performance of the Funds at par with the level expected by the prospective investors. 5.7 Suggestions and Recommendations

Servicing the customers and guiding them to achieve their financial goals shall determine the sustainability of mutual fund market in future. Investors should be aware of the sectors in which they are investing and should have a clear outlook on the performance of their investments, with all the risks explained. The financial services landscape in India is transforming, with a plethora of changes taking place at the regulatory front. Against this backdrop, mutual funds must re-structure their existing businesses strategies to meet the changing needs of their clients and provide them with complete investment solutions. Although emerging markets such as India offer a wide range of investment choices, it is important to design innovative products to fuel the growth of the mutual fund industry, particularly in Kerala. Based on the findings and observations made through this study the following suggestions are given.

5.7.1 Product Design

The study reveals that the investors are considering factors like service quality and fund quality as the core of the product at the time of mutual fund investments. Strong customer focus is essential in a market like Kerala where the competition among financial market players is common. A prudent product design with customised features spelt out in this research will make the new mutual fund products attractive for the Keralites.

Mutual fund products need to be simplified if they have be sold to the masses through a public sector bank channel. This is possible since most of the people would like to make regular transactions with banks. The product needs to copy a fixed deposit or chitty and provide a predictable income. Multiplicity of products creates confusion in the mind of customers. Right products should be offered to the right customers for which the funds need to reduce the number of schemes through clubbing different ones with similar objectives. Multiple share class structure, like that of chitty in Kerala, should be promoted for which the fund managers need to enhance the potential of their systematic investment plans.

5.7.2 Use of Technology

Technological innovations like „Shared Services‟ can bring many conveniences to the investors and allow Mutual Funds to significantly enhance their reach and presence in the country. This shall help Funds to reach further to the goals of retail penetration. Such initiative will also help to remove duplicities in the system and reduce the inherent risks in the industry. It can enhance operational efficiency and developing customer centric products with a focus on profitability and better customer service. Mobile phones and the internet in urban and rural areas can be used as a platform to educate consumers regarding products and its benefits. Mobiles powered with the internet can be used as an important information source for unit holders and prospective investors. The usage of mobiles or tablets by sales channels has far reaching effects and can be a facilitator to educating customers about products, capturing information of investors in Kerala.

5.7.3 Investor Awareness

Lack of awareness and financial illiteracy is one of the major problems identified in this study regarding mutual fund investments. Mutual funds should realize that they need to invest in financial education and awareness in order to reap long-term benefits. Campaigns to educate the investors should be conducted. Fund houses may try to bring novelty to the way they connect with their target customers. Regulators and agencies in Mutual fund industry also engaged in the investor awareness Programme. Digital strategy can also use for creating financial literacy among investors. 5.3 Conclusion

The study analysed the behaviour and perception of investors for looking into the potentials of mutual fund investment in the state. Under a descriptive research framework, through rigorous statistical procedures on the multiple responses of 200 Mutual Fund Investors and 200 Non mutual Fund Investors, the study was able to make out prolific findings relevant for the development and growth of mutual fund market in Kerala.

Non mutual fund investors have lower inclination to corporate securities and they have the feeling that mutual fund investments are risky. Inadequate investor protection measures and imperfect market conditions are raised as the main factors contributing risks to fund investments. Here the role of regulators is crucial. Fund quality is remained as a problem even to mutual fund investors of the state. A good investment plan with customised and innovative features is highly essential for the fund investments to penetrate deep in to the market. Priorities should be given to the improvement in services rendered by mutual funds. Such actions definitely improve the investment conditions of mutual fund market in Kerala thereby the growth of the sector.

Innovative products with fewer risk, speed and efficient grievance redressal together with imparting professionalism in investor services definitely can find good market for mutual fund instruments in Kerala given the buoyant capital market conditions of India. Fund managers should understand the general investor behaviour of Keralites and must trace out the forces restraining them to be the part of the system. This shall help them to design fund schemes that has a perfect match with the investor expectations. Policy makers of the country should draft apposite policy framework conducive for the growth of mutual fund market in the states like Kerala. Such initiatives at national level, at least partially, could address the developmental issues of whole nation. d. Contributions of the Study

The study makes the following contribution to Mutual funds, the mutual fund regulators across India want to encourage the participation of individual investors with mutual fund product. The small investors purchase behaviour does not have a high level of coherence due to the influence of different purchase factors. The factors identified in the study provide key information inputs regarding investor‟s preferences and priorities that will guide future mutual fund product managers in designing attractive mutual fund products for Keralites. 5.5 Scope for Further Research

1. To test the efficacy of behavioural finance theory postulates of Mutual Fund investors on an Indian plat form. 2. Further research should be carried out in order to enhance the understanding of the concepts of service quality and Investor satisfaction, how they are measured because they are very important for mutual fund organizations in terms of prospects of mutual fund investment.

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Annexure -1 PROFILE OF SAMPLE INVESTORS.

Table 5.1: Family Profile of investors Non-MF MF Investors Total Factors investors N % N % N % Rural 94 47.00 98 48.75 192 47.88 Place Urban 106 53.00 102 51.25 208 52.13

No of <=3 30 15.25 35 17.50 65 16.38 members 4 102 51.00 91 45.25 193 48.13 in the family 4+ 67 33.75 75 37.25 142 35.50 Low-Up to 4 lakh 48 24 34 17.25 82 20.63 Medium-Above 4 lakh Annual 92 45.75 113 56.75 205 51.25 income below 7 lakh

High- 7lakhs and above 61 30.25 52 26 113 28.13 Source: Survey data

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PROBLEMS &PROSPECTS OF MUTUAL FUND INVESTMENTS A PERCEPTIVE STUDY ON KERALITES

Questionnaire for Investors Name Place Schedule number 1 Rural

2 Urban

Part-I PERSONAL PROFILE 1. Age

2. Gender 1. Male 2. Female

3. Marital Status: 1. Married 2. Unmarried 3. Widowed

4. No of members in the family

5. Education 6.Occupation

7. Gross Annual income 8.Average Annual savings

SAVING AND INVESTMENT

9. How much do you invest annually?

10. Mark (Please (√) your preference for investment avenues.

If your savings increases, Mark your investment No. Investments your preferred marking (Top 3 option) (Top 3option) 1 Bank Deposits 2 Gold / E - Gold 3 PO Savings/NSC 4 Insurance 5 PF 6 Real Estate 7 Shares 8 Bonds 9 Mutual Funds 10 Chitty Part –II

11. Please rate the requirement of following features in mutual funds while selecting it. Please (√) tick the appropriate option. Requirement. 1 = Least; 2 = Low; 3 = No. Investment objectives and features Moderate; 4 = High; 5 = Most 1 Safety 1 2 3 4 5 2 Liquidity 1 2 3 4 5 3 Return 1 2 3 4 5 4 Tax Saving 1 2 3 4 5 5 Govt. Regulation 1 2 3 4 5 6 Service 1 2 3 4 5

12. Please rate the problems considered in mutual funds while selecting it. Please (√) tick the appropriate option Considered 1 = Least; 2 = Low; 3 No Perspective problems in Mutual Fund Investment = Moderate; 4 = High; 5 = Most 1 2 3 4 5 1 Time consuming process in Mutual fund distribution 1 2 3 4 5 2 Inferior Investment Plans 1 2 3 4 5 3 Lack of Good regulatory mechanism 1 2 3 4 5 4 Misleading advice from Mutual fund distributors 1 2 3 4 5 5 Cost /expenses charged by Mutual funds 1 2 3 4 5 6 Problems in distribution Technology 1 2 3 4 5 7 Information provided by distributors is not clear. 1 2 3 4 5 8 Investment Term 1 2 3 4 5 9 Better service from other NBFC distributors 1 2 3 4 5 10 Less Liquidity 1 2 3 4 5 11 New and private sector mutual funds are not safe 1 2 3 4 5 12 High risk 1 2 3 4 5 Mutual funds are not able to satisfy the investors‟ 13 1 2 3 4 5 confidence in distributors. 14 Lack of assistance in mutual fund transaction 1 2 3 4 5 15 Inefficient fund Managers 1 2 3 4 5 13. What are the Investment Decision parameters for selecting mutual fund investment? and Please (√) tick the appropriate option.

14. Please rate your expectation for investing your money in mutual funds. Please (√) tick the appropriate option Expectation Prospective features in Mutual Fund Investment and 1 = Very Low; 2 = Low; No perception of investor service 3 = Moderate; 4 = High; 5 = Very High 1 Investment promotional measures by Government. 1 2 3 4 5 2 Expert advice and service from brokers financial advisors/ 1 2 3 4 5 agents 3 Direct and Technology enabled service for frequent 1 2 3 4 5 communication/information - Information Service

4 Role in investor Complaints 1 2 3 4 5

5 Investor protection 1 2 3 4 5

6 Professional fund management 1 2 3 4 5

7 Service for investor grievance 1 2 3 4 5

8 Mutual Funds helps to use modern technology in investments 1 2 3 4 5

9 Mutual funds Advisory service in local language 1 2 3 4 5 10 Older mutual funds provide stable return and Public sector 1 2 3 4 5 mutual funds are safe. 11 It is an investment option suitable for modern economy. 1 2 3 4 5

12 Long term investment in MF reduce risk- High risk high profit 1 2 3 4 5 13 Facilities for various investment plans such as SIP and 1 2 3 4 5 Switching transactions 14 Product information 1 2 3 4 5 15 Facility of various modes for payment 1 2 3 4 5

Part-III (For Mutual Fund investor only) 15. Name of your Mutual Fund Investment organization(s)/AMC 1. 2. 3. 4.

16. In which type of Mutual Fund would you like to invest? (Please (√) tick the appropriate option). You can mark more than one option. 1. Debt funds 2. Equity funds 3. Hybrid funds (Balanced) 4. Liquid funds 5. ELSS Funds 6. Others (ETF, Fund of Funds investing overseas) 17. Suggestions, if any, for the betterment of mutual fund investments in your State:

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