CHAPTER – V

SEGMENTING
MUTUAL FUND
INVESTORS
 CHAPTER – V

SEGMENTING MUTUAL FUND INVESTORS

In this chapter, the relationships among 4 sets of variables -information

sources used for mutual fund purchase, selection criteria for deciding among

alternative funds, mutual fund ownership ·characteristics and consumer demographic

data is explored. An attempt is made to identify groups of investors who display intra

group homage and inter-group heterogeneity regarding the use of information sources

and selection criteria in their mutual fund investment decision. Such "market

segments" might exhibit unique mutual fund investment behaviour and possess

unique demographic characteristics. These market segments will provide insights

valuable to mutual fund managers for developing marketing strategies for their funds

among retail investors, thus improving the rate of mutual fund penetration among this

segment.

Factor and cluster analysis identified 3 investor groups each on the basis of

information sources used and the selection criteria employed. The three information

source groups and the three selection criteria groups were formed from the same set of

investors. It is expected that the two sets of groups will be interrelated such that

membership of a particular information source group is non -randomly distributed

1
among the selection criteria groups and vice versa. Cross tabulation of the 3

information source groups and 3 selection criteria groups resulted in the formation of

9 combined groups. Chi square test and F test was used to explore the association of

these combined groups to the fund ownership characteristics and investor

demographics. This chapter is organized as follows:

 Identifying the importance attached to different information source and

selection criteria.

 Factor analysis to reduce these information source and selection criteria

variable into confirmatory as well as explanatory variables.

 Cluster analysis for grouping investors on the basis of information sources and

selection criteria independently.

 Cross tabulation sources and selection criteria clusters.

 Identifying the association between the combined groups and demographic

variables.

 Identifying the association between the combined group and fund ownership

characteristics

Information Sources

In the purchase decision process, consumers receive information from

different sources. The "Sources of information" in this context refers to a place or

person from which one obtains information about mutual funds. Based on 'theory, past

research, and judgment of the researcher, 12 information sources which could help

investors choose a mutual fund are identified. These variables are qualitative in

nature; therefore a Likert type scaling is used. The respondents were asked to rate the

importance of the 12 specified variables on a 5 point scale ranging from extremely

important to not at all important in order to find out the importance attached to them.

The weighted average scores are studied to understand the degree of importance

attached to these investment objectives: The weighted average scores (W AS) have

been calculated by providing weights +2 ,+1 ,0, -1, and -2 to very important, (VI)

important ( I ) , neutral (N ) not important (NI ) and not at all important (NNI ) in that
order. Table 5.1 presents the information sources and the frequencies along with the

weighted score and ranks.

Of the 12 information sources surveyed the most important source overall was

the recommendations in financial news papers, investment magazines, business news

channels (WAS=0.891) followed by published performance rankings of independent

research agencies (WAS=0.858), recommendations of friends/family business

associates (WAS=0.833), recommendations of Financial advisors/ Distribution

Companies (WAS=0.779) in that order. Advertisements in the print media

(WAS=0.64) are also considered an important source. An important point to be noted

here is that advertisement in sources other than the print media (W AS=0.045) comes

eleventh in importance. Seminar Investor club activities (WAS=-0.766) are

considered as least important among the 12 variables surveyed. The results of the

survey are more or less consistent with the survey results of the study conducted by

Noel Capon (1996).

Selection criteria

Selection criteria refer to a set of product or service attributes that consumers

consider when making purchase decisions among alternatives. The present study

focuses on 24 attributes of Mutual Funds. An attempt is made to identify those

attributes or characteristics that are important to an investor when making investment

decisions. The respondents were asked to rate the importance of the 24 specified

variables on a 5 point scale ranging from extremely important to not at all important

in order to find out the importance attached to them. The weighted scores are studied

to understand the degree of importance attached to these investment objectives. The

weighted scores (WS) have been calculated by providing weights +2 ,+1 ,0, -1, and2

to very important, (VI) important ( I ) , neutral (N ) not important (NI ) and not at all
important (NNI ) in that order. Table 5.2 presents the selection criteria employed and

the frequencies along with the weighted score and ranks.

Past performance of the fund/scheme was rated the most important selection

criterion. Other important selection criteria include Funds reputation or brand name,

Investment objective [growth, income balanced], Promptness in service. A deeper

analysis of the results reveal that what prospective investors look into is the

performance figures per se and not the factors that contributed to the performance

like, for example the portfolio characteristics, expense ratio etc.,. Analyses also reveal

that investors are concerned not only with the financial performance dimension but

also with the service dimension. The CII-KPMG survey in May 2009 across top cities

in India revealed that 24 percent of the survey respondents selected mutual funds on

the basis of past performance and 22 percent of them for the brand name of the fund

houses. These were the first and second most important reasons respectively among

six reasons 3. Results of the present study also rates past performance and brand name

of the fund houses as the top 2 selection criteria respectively. Surveys and

experiments gauging investor views uniformly identify the importance of a fund's past

returns. For example, Wilcox's experiment (2003)4 requiring investors to choose

between hypothetical mutual funds found that a fund's returns over the past ten years

and over the past year are the two most important factors to investors. Also, the

survey by Capon, Fitzsimons, and Rice (1996)5 of households that invest in mutual

funds found that a fund's "investment performance track record" is the most important

factor in investors' choice of funds. Ramasamy and Yeung (2003)6 found that past

performance was the most significant attribute considered by Malaysian investment

advisors in selecting mutual funds. In addition, the ICI survey of fund investors

(2006)7 found that 69 percent of respondents stated they reviewed a fund's "historical

performance" before investing in a fund.

 TABLE-5.1
INFORMATION SOURCES FOR MUTUAL FUND PURCHASE
VI I NI N NNI
Information Score WAS Rank
No. % No % No. % No % No. %
Advertisement in print media. 125 20.6 284 46.9 88 14.5 72 11.9 37 6.1 388 0.64 5
Advertisement in T.V, internet, radio 27 4.5 192 31.7 206 34 143 23.6 38 6.3 27 0.045 11
--Web sites of AMFI, SEBI respective 83 13.7 218 36 183 30.2 84 13.9 38 6.3 224 0.370 8
mutual fund
Recommendations of friends/family 139 22.9 308 50.8 89 14.7 59 9.7 11 1.8 505 0.833 3
business Aassociates
Recommendations in financial news 138 22.8 319 52.6 109 18 25 4.1 15 2.5 540 0.891 1
papers, 1investment magazines, business
news channels
-Direct mail, / news letters, / fact sheets. 34 5.6 180 29.7 238 39.3 112 18.5 42 6.9 52 0.086 10
Mutual fund books 51 8.4 167 27.6 244 40.3 106 17.5 38 6.3 87 0.144 9
Published performance rankings of 137 22.6 309 51 105 17.3 47 7.8 8 1.3 520 0.858 2
independent 2research agencies
Recommendations of Financial advisors 109 18 327 54 111 18.3 45 7.4 14 2.3 472 0.779 4
Distribution Companies
Offer documents of respective mutual 94 15.5 234 38.6 180 29.7 78 12.9 20 3.3 304 0.502 7
fund schemes
Half-yearly Annual reports of mutual 97 16 223 36.8 206 34 55 9.1 25 4.1 312 0.515 6
fund
Seminar Investor club activities -- 18 3 42 6.9 162 26.7 226 37.3 158 26.1 -464 -0.766 12
Source: Primary data
 TABLE-5.2
SELECTION CRITERIA FOR MUTUAL FUND PURCHASE
Selection
VI I N NI NNI Wt
Criteria Rank
Scores
No. % No % No. % No % No. %
Past performance 352 58.1 249 41.1 4 0.7 0 0 1 0.2 952 1
Fund reputation 269 44.4 318 52.5 14 2.3 5 0.8 0 0 846 2
/brand
No. of schemes in 34 5.6 191 31.5 253 41.7 108 17.8 20 3.3 73 24
that fund
Investment 194 32 383 63.2 23 3.8 6 1 0 0 759 3
objective
Scheme’s 63 10.4 270 44.6 198 32.7 64 10.6 11 1.8 257 20
expense ratio
Fund manager’s 126 20.8 266 43.9 179 29.5 31 5.1 4 0.7 452 14
reputation
Rating by rating 108 17.8 334 55.1 125 20.6 31 5.1 8 1.3 480 12
agency
Innovativeness of 62 10.2 272 44.9 218 36 47 7.8 7 1.2 295 19
scheme
Entry and exit 133 21.9 323 53.3 112 18.5 34 5.6 4 0.7 517 11
load
Tax benefits 156 25.7 303 50 107 17.7 32 5.3 8 1.3 453 13
NAV/Purchase 183 30.2 312 51.5 69 11.4 26 4.3 16 2.6 610 9
prince
Assets under 66 10.9 278 45.9 228 37.6 26 4.3 8 1.3 350 17
management
Collaboration 49 8.1 234 38.6 233 38.4 71 11.7 19 3.1 171 22
with Int.Funds
Portfolio 39 6.4 232 38.3 298 49.2 31 5.1 6 1 242 21
characteristics/
Withdrawal 168 27.7 261 59.6 54 8.9 16 2.6 7 1.2 658 6
facilities
Holding another 43 7.1 242 39.9 230 38 36 12.5 15 2.5 161 23
schemes of the
same fund
Responsiveness 127 21 332 54.8 110 18.2 31 5.1 6 1 518 10
of enquiries
Minimum 104 17.2 300 49.5 129 21.3 60 9.9 13 2.1 375 16
investment
Additional 86 14.2 272 44.9 174 28.7 56 9.2 18 3 314 18
features like
phone, service,
SIP,
Distribution net 104 17.2 285 47 154 25.4 53 8.7 10 1.7 377 15
work
Promptness in 198 32.7 254 58.4 42 6.9 7 1.8 1 0.2 727 4
service
Investor right 160 26.4 357 58.9 70 11.6 18 3 1 0.2 640 7
adherence
Grievance 188 31 332 54.8 70 11.6 14 2.3 2 0.3 678 5
redressal
Lock in period. 182 30 314 51.8 80 13.2 26 4.3 4 0.7 622 8
Source: Primary data
 While many investors tend to choose mutual funds largely on the basis of past

performance, empirical evidence on the historical relationship between returns in

successive years is mixed. Siri and Tufano (1998)8, and Ippolito (1992)9 report that

investors generally invest in positive performance funds and divest from poor

performing fund. However Fabian Niebling(2009)lO show that the majority of

individual investors do not use historical performance as their decision criterion the

dominant factor for this being lack of investor sophistication. Capon et al. (1996)11

asked mutual fund investors to rate the importance of nine factors in choosing a

particular mutual fund. The ratings could range from one (not at all important) to five

(extremely important). The respondents gave management fees an average rating of

only 2.28, fifth among the nine factors. The present study rated schemes expense ratio

twentieth among twenty four factors surveyed presenting almost a similar picture that

schemes expenses are among the least considered while choosing a mutual fund

scheme.

Factor analysis for Information Sources:

Factor Analysis by Principal Component Method is applied to reduce the 12

variables into confirmatory as well as explanatory factors. In order to reduce the

variables systematically KMO and Bartlett's tests are applied to test the sampling

adequacy for data reduction process as well as formation of a bell shaped normal

distribution for primary data. Table 5.3 presents KMO and Bartlett's tests.

TABLE-5.3
KMO AND BARTLETT'S TEST INFORMATION SOURCES
Kaiser-Meyer-Olkin Measure of Sampling Adequacy 0.754
Bartlett's Test of Sphericity Approx. Chi -Square 1327.946
Degree of Freedom 66
Significance 0.000
 From the above table it is found that KMO measure of sampling adequacy is

0.754, Chi-square value for Bartlett's Test of Sphericity is 1327.946 which is

statistically significant at 5% level of significance. Therefore it can be concluded that

the data reduction process will not alter the normal distribution for the number of

samples and will also emerge out the meaningful factors.

The following Communality Table 5.4 gives the contribution of individual

variance of all the 12 variables which ranges from 0.290 to 0.756. This shows that the

variance of these 12 variables range from 29% to 75.6% respectively. The factors

derived will represent the variables significantly.

TABLE-5.4
COMMUNALITIES INFORMATION SOURCES
Formation Sources Initial Extraction
VI: Advertisement in Print media 1.000 0.756
V2: Advertisement in TV, Internet, Radio 1.000 0.681
V3: Web sites of AMPI, SEBI respective 1.000 0.355
mutual fund.
V4: Recommendations of friends/farnily 1.000 0.482
business associates.
V5: Recommendations in financial news 1.000 0.472
papers, business new channels
V6: Direct mail, /news letters, Ifact 1.000
sheets.
V7: Mutual fund books
V8: Published performance rankings of
independent research
V9: Recommendations of Financial
advisors/ Distribution Companies.
V10: Offer documents of respective mutual
fund schemes
V11: Half-yearly/Annual reports of mutual
fund
V12: Seminar/Investor club activities
Source: Primary Data

The following Total Variance Table 5.5 presents the individual variances and

Eigen values for each component considered as an independent scalar.

 FIGURE – 5.1
COMMUNALITIES INFORMATION SOURCES

VI: Advertisement in Print

media

V2: Advertisement in
TV, Internet, Radio

V3: Web sites of AMPI, SEBI

respective mutual fund.

V4: Recommendations
offriends/farnily business
associates.

From the above table it is found that the emerged factors individually possess

the variances 19.531%, 16.182%, and 14.153% along with Eigen values 2.344,1.942,

and 1.698 which are strictly greater than 1. Therefore it is concluded that 3 factors

with total variance 49.866% represents all the 12 variables. The component variables

for each factor are presented in the following Rotated Component Matrix Table 5.6.
 TABLE-5.5
TOTAL VARIANCE EXPLAINED INFORMATION SOURCES
Extraction Sums of Squared
Initial Eigen values Loadings Rotation sums of Squared Loadings
Component
Total Percentage Cumulative Total Percentage Cumulative Total Percentage Cumulative
Of variance Percentage Of variance Percentage Of variance Percentage
1 3.220 26.833 26.833 3.220 26.833 26.833 2.344 19.531 19.531

2 1.553 12.938 39.770 1.553 12.938 39.770 1.942 16.182 35.713

3 1.212 10.096 49.866 1.212 10.096 49.866 1.698 14.153 49.866
4 0.941 7.845 57.712
5 0.836 6.971 64.682
6 0.814 6.787 71.469
7 0.784 6.532 78.001
8 0.701 5.840 83.841
9 0.588 4.901 88.472
10 0.531 4.427 93.169
11 0.472 3.933 97.102
12 0.348 2.898 100.000
Source: Primary Data
 TABLE-5.6
ROTATED COMPONENT MATRIX INFORMATION SOURCES
Formation Sources Component
1 2 3
V11 Half yearly / Annual reports of 0.711
mutual fund
V10 Offer documents of respective mutual 0.671
fund schemes
V7 Mutual fund books 0.636
V8 Published performance ranking of 0.612
research agencies
V3 Web sites of AMFI,SEBI respective 0.446
mutual fund.
V1 Advertisement in print media 0.837
V2 Advertisement in TV, Internet, Radio 0.812
V9 Recommendations of IFAs / 0.700
Distribution companies.
V4 Recommendations of IFAs / family 0.678
associates
V5 Recommendation in financial papers, 0.552
news channels.
V6 Direct mail / news / fact sheet 0.496
Source: Primary Data
From the above table we find that:
Factor I has high coefficient for variables
FIGURE – 5.2
ROTATED COMPONENT MATRIX INFORMATION SOURCES

V11 Half yearly / Annual

reports of mutual fund

0.446 0.711 V10 Offer documents of

respective mutual fund
schemes
0.612
V7 Mutual fund books
0.671
0.636
V8 Published performance
ranking of research agencies

V3 Web sites of AMFI,SEBI

respective mutual fund.
V 11: Reports of Mutual fund companies published to fulfill mandatory requirements

(0.711)

V 10: Offer documents of Mutual Fund Schemes (0.671) V 7: Mutual Fund Books

(0.636) V 8: Published performance rankings of independent research agencies

(0.612) V 3: Web Sites of AMPI, SEBI, respective mutual funds (0.446)

If these variables are observed they are centered on the category of decision

based on unbiased information sources requiring an independent analysis. Hence this

factor can be labeled as "Unbiased information seeking investor".

Factor 2 has high coefficient for variables

VI: Advertisement in news papers, magazines and other print media. (0.837) V2:

Advertisement in TV, internet, radio (0.812)

These variables when observed can be centered on the category of decision· based on

seeing an advertisement. Hence this factor can be labeled as "advertisement

influenced investor". Factor 3 has high coefficient for variables V9:

Recommendations of brokers/agents/financial advisors/distribution companies (0.700)

V4: Recommendations of friends/farnilylbusiness associates (0.678) V5:

Recommendations in financial news papers, investment magazines, business news

channels. (0.552) V6: Direct mail/ news letter. (0.496).

These variables on observation indicate that the decision for investment is based on

recommendations privately circulated or published, personal or impersonal. So this

factor is labeled as "recommendation influenced investor."

V 10: Offer documents of Mutual Fund Schemes (0.671) V 7: Mutual Fund Books

(0.636) V 8: Published performance rankings of independent research agencies

(0.612) V 3: Web Sites of AMFI, SEBI, respective mutual funds (0.446)

 If these variables are observed they are centered on the category of decision

based on unbiased information sources requiring an independent analysis. Hence this

factor can be labeled as "Unbiased information seeking investor".

Factor 2 has high coefficient for variables

VI: Advertisement in news papers, magazines and other print media. (0.837) V2:

Advertisement in TV, internet, radio (0.812)

These variables when observed can be centered on the category of decision· based on

seeing an advertisement. Hence this factor can be labeled as "advertisement

influenced investor".

V 10: Offer documents of Mutual Fund Schemes (0.671) V 7: Mutual Fund Books

(0.636) V 8: Published performance rankings of independent research agencies

(0.612) V 3: Web Sites of AMFI, SEBI, respective mutual funds (0.446)

If these variables are observed they are centered on the category of decision based on

unbiased information sources requiring an independent analysis. Hence this factor can

be labeled as "Unbiased information seeking investor".

Factor 2 has high coefficient for variables

VI: Advertisement in news papers, magazines and other print media. (0.837) V2:

Advertisement in TV, internet, radio (0.812)

These variables when observed can be centered on the category of decision· based on

seeing an advertisement. Hence this factor can be labeled as "advertisement

influenced investor".

Factor 3 has high coefficient for variables

V9 Recommendations of brokers/agents financial advisors/distribution companies

(0.700)

V4 Recommendations of friends/family business associates (0.678)

V5 Recommendations in financial news papers, investment magazines, business

news channels. (0.552)

V6 Direct mail/ news letter. (0.496).

These variables on observation indicate that the decision for investment is

based on recommendations privately circulated or published, personal or impersonal.

So this factor is labeled as "recommendation influenced investor."

Factor analysis for Selection Criteria employed

The raw data with respect to selection criteria employed was factor analyzed

using SPSS 17.0 to summarise the 24 attributes into smaller sets of linear composites

that preserved most of the information in the original set of data. The Kaiser-

MeyerOlkin & Bartlett's test applied to test the sampling adequacy for data reduction

process is presented in Table 5.7

TABLE-5.7
KMO AND BARTLETT'S TEST SELECTION CRITERIA
Kaiser-Meyer-Olkin Measure of Sampling Adequacy 0.791
Approx. Chi -Square 13316.496
Bartlett's Test of Sphericity Degree of Freedom 276
Significance 0.000

From the above table it is found that KMO measure of sampling adequacy

0.791 and the Bartlett's Test of Sphericity 13316.496 is statistically significant at 5%

level of significance, thus indicating that the sample is suitable for factor analytic

procedures.

Table-5.8 gives the contribution of individual variance of all the 24 variables

which ranges from 0.432 to 0.766. The factors which will be derived will represent

the variables significantly.

 TABLE-5.8
COMMUNALITIES SELECTION CRITERIA
Selection Criteria Variables Initial Extraction
V1 Past performance 1.000 0.625
V2 Fund reputation brand name. 1.000 0.677
V3 No. of schemes in that fund. 1.000 0.473
V4 Investment objective 1.000 0.581 1.000 0.581
V5 Scheme's expense ratio. 1.000 0.484
V6 Fund manager's reputation 1.000 0.488
V7 Rating by rating agency 1.000 0.534
V8 Innovativeness of schemes 1.000 0.432
V9 Entry and exit load 1.000 0.582
V10 Tax benefits 1.000 0.484
V11 NAV/ Purchase Prince 1.000 0.580
V12 Asset under management 1.000 0.564
V13 Collaboration with international funds 1.000 0.598
V14 Portfolio characteristics 1.000 0.553
V15 Withdrawal Facilities 1.000 0.575
V16 Holding another scheme of the same fund. 1.000 0.547
V17 Responsiveness enquiries. 1.000 0.551
V18 Minimum Investment 1.000 0.544
V19 Additional features like phone service, SIP 1.000 0.482
V20 Distribution net work 1.000 0.454
V21 Promotion in service 1.000 0.744
V22 Investors right adherence 1.000 0.738
V23 Grievance redressal 1.000 0.766
V24 Lock in period 1.000 0.508

The Total Variance exhibited in Table 5.9 presents the individual variances

and Eigen values for each component. It is found that the 7 emerged factors

individually possessed variances 13.772 percent, 7.738 percent, 7.552 percent, 7.286

percent, 6.790 percent, 6.610 percent 'and 6.356 percent along with Eigen values

3.305, 1.857, 1.813, 1.749, 1.630, 1.586 and 1.526 which are strictly greater than 1. It

is therefore concluded that these 7 factors with total variance of 56.106 percent

represent all the 24 variables.

 TABLE-5.9
TOTAL VARIANCE EXPLAINED -SELECTION CRITERIA
Component Extraction sums of squared Rotation Sums of Squared
Initial Eigen vales
Loadings Loadings
% Cumulative % Cumulative % Cumulative
Total Total Total
variance % variance % variance %
1 4.479 18.664 18.664 4.479 18.664 18.664 3.305 13.772 13.772
2 2.395 9.980 28.644 2.395 9.980 28.664 1.857 7.738 21.510
3 1.667 6.946 35.586 1.667 9.946 35.589 1.813 7.552 29.510
4 1.461 6.087 41.676 1.461 6.087 41.676 1.749 7.286 29.062
5 1.346 5.609 47.285 1.346 5.609 47.285 1.630 6.790 36.348
6 1.114 4.643 51.928 1.114 4.643 51.928 1.586 6.610 43.138
7 1.002 4.176 56.104 1.002 4.176 56.104 1.526 6.356 49.747
8 0.997 4.153 60.257 56.104
9 0.864 3.599 63.856
10 0.828 3.449 67.305
11 0.822 3.424 70.729
12 0.785 3.271 74.001
13 0.756 3.151 77.152
14 0.718 2.991 80.143
15 0.648 2.702 82.845
16 0.616 2.567 85.412
17 0.577 2.404 87.816
18 0.562 2.340 90.156
19 0.496 2.057 92.223
20 0.473 1.971 94.194
21 0.443 1.845 96.039
22 0.402 1.675 97.715
23 0.328 1.366 99.081
24 0.221 0.919 100.000
 TABLE-5.10
ROTATED COMPONENT MATRIX SELECTION CRITERIA
Selection Components
Criteria 1 2 3 4 5 6 7
V:23 .854
V:21 .854
V:22 .843
V:17 .615
V:20 .558
V:19 .538
V:14 .771
V:12 .710
V:13 .568
V:06 .563
V:08 .458
V:16 .702
V:03 .424
V:07 .698
V:04 .598
V:10 .421
V:09 .654
V:15 .646
V:05 .561
V:24 .666
V:11 .624
V:18 .515
V:02 .771
V:01 .744

The component variables for each factor are presented in the Rotated

Component Matrix Table 5.10 above. From the above table, it is observed that:

Factor I has high coefficient for variables V 23: Grievance redressal (0.854) V 21:

Promptness in service (0.845) V 22: Investor right adherences (0.843) V 17:

Responsiveness to enquiries (0.615). V 20: Distribution network (0.558) V 19:

Additional features like transaction by phone service (0.538).

If these variables are observed they are centered on the category of selection

based on investor rights and services. Hence this factor can be labeled as "Investor

rights and services".

Factor 2 has high coefficient for variables

V 14: Portfolio Characteristics (0.711) V 12: Assets under management (0.710) V 13:

Collaboration with international funds (0.568) V 6: Fund manager's reputation and

strength of research team (0.563) V 8: Innovativeness of the scheme (0.458)

These variables on observation Indicate that the decision for investment is based on

the various aspects of managing the portfolio of the fund. So this factor is labeled as

"Fund Management".

Factor 3 has high coefficient for variables V 16: Holding another scheme of the same

fund (0.702).

V 3: Number of Schemes in that fund (0.424)

These variables when observed can be centered on the category of decision

based on past experiences with the same .fund house. Hence this factor can be labeled

as "Past Experience with the Fund Family".

Factor 4 has high coefficient for variables

V: 7 Rating by rating agency (0.698) V 4: Investment objective (0.598) V 10: Tax

benefits associated with the scheme (0.421)

These variables when observed can be centered on the category of decision

based investment objectives of the investor. Hence this factor can be labeled as

''Investment objectives".

Factor 5 has high coefficient for variables

V 9: Entry I Exit load (0.654)

V 15: Withdrawal Facilities (0.646)

V: 5 Expense Ratios. (0.515)

 These variables when observed are related to the Fund Management cost.

Hence this factor can be labeled as "Fund Management Expenses".

Factor 6 has high coefficient for variables

V 24: Lock in period (0.666)

VII: NAV/Purchase price (0.624) V 18: Minimum investment (0.515)

A common factor underlying these variables is the cash commitments for the

investor. So this factor is labeled as "Cash commitments".

Factor 7 has high coefficient for variables "2,: Funds reputation or Brand

Name (0.771) " 1: Past performance of the fund andlor scheme (0.744)

Brand name is a function of past performance and hence this factor has been

labeled "Past Performance and Brand Equity".

Respondent Grouping through Cluster Analysis

Cluster analysis is a multivariate technique to classify the sample into disjoint

classes. These disjoint groups are heterogeneous in nature and they are classified

based on the parametric values with significant difference among them. The number

of clusters is obtained through the large scale coefficients in the hierarchical cluster

with agglomeration schedule. Cluster analysis permitted grouping of investors on the

basis of both information sources and selection criteria.

Information Sources Clusters

Cluster analysis shows 3 types of investor behaviour in information search

based on sources of information used. They have been categorized as "Believers",

"Passives", and "thinkers". This is exhibited in Table 5.11

Factor 7 has high coefficient for variables V 2: Funds reputation or Brand Name

(0.771) V 1: Past performance of the fund and/or scheme (0.744)

Brand name is a function of past performance and hence this factor has been labeled

"Past Performance and Brand Equity".

Respondent Grouping through Cluster Analysis

Cluster analysis is a multivariate technique to classify the sample into disjoint

classes. These disjoint groups are heterogeneous in nature and they are classified

based on the parametric values with significant difference among them. The number

of clusters is obtained through the large scale coefficients in the hierarchical cluster

with agglomeration schedule. Cluster analysis permitted grouping of investors on the

basis of both information sources and selection criteria.

Information Sources Clusters

Cluster analysis shows 3 types of investor behavior in information search

based on sources of information used. They have been categorized as "Believers",

"Passives", and "thinkers". This is exhibited in Table 5 .11

TABLE-5.11
INFORMATION SOURCES CLUSTERS
Clusters
. Factors
1 2 3
Factor 1 Unbiased information influenced investors 3.07 3.18 3.87
Factor 2 Advertisement influenced investors 3.49 1.78 3.87
Factor 3 Recommendation influenced investors 3.4 3.18 4
Number of Respondents 197 118 291
Percentage 32.5 19.5 48%
% %

Believers The most distinguishing feature of this group (32.5 %) was the high

importance given to advertisements and recommendations (personal and impersonal)

as information sources which influenced them in their mutual fund decision. They
gave less importance to information sources which were unbiased or objective in

nature. They tended to believe the recommendations and advertisements and act on it

rather than on themselves to do an independent analysis of various unbiased

information sources.

Passives this group (19.5%) consisted of investors who were highly insensitive

to advertisements. They were low in their information search behaviour .They seem to

be passive in seeking information. Hence they have been named "passives".

Thinkers The title of this group (48%) was chosen based on the member's

reliance on information sources which were unbiased in nature, the information

content of which required some independent analysis. (for example books ,key

information documents of mutual fund schemes, reports of mutual fund companies

etc) .At the same time this group was also highly sensitive towards advertisements as

well as recommendations from both personal and impersonal sources. They see the

inputs from recommendations and advertisements as complementary rather than as

authoritative.

Selection Criteria Clusters

Table-5.12 presents data on the three groups that were formed from the cluster

analysis of selection criteria. The groups differed from each other in the selection

criteria employed for mutual fund investment decision. They have been categorized as

"Informed Knowledge driven investors", ''Performance only driven investors" and

"Performance and cash commitment driven investors" All the groups of given high

importance to performance and brand equity.

 TABLE-5.12
SELECTION CRITERIA CLUSTERS
Clusters
Factors
1 2 3
Factor 1 Investor Rights and services 4.2 3.65 3.82
Factor 2 Fund Management 3,87 3.18 3.35
Factor 3 Past experiences with the fund family 3.64 2.48 3.18
Factor 4 Investment Objectives 4.31 3.86 3.96
Factor 5 Fund Management Expenses 4.18 3.11 3.43
Factor 6 Cash Commitments 4.15 3.07 4.00
Factor 7 Performance And Brand Name 4.64 4.31 4.32
Number of cases in each cluster 264 90 252
Percentage 32.5% 19.5% 48%

Informed Knowledge driven investors. The largest of the three groups

(43.56%), these investors gave performance 3:nd brand equity very high rating. A

distinguishing feature of this group is that high ratings are also given to investment

objectives, investor rights and services fund management expenses and cash

commitments.

Performance only driven investors. (Price insensitive) This group of investors

(14.86%) is only concerned about past performance. A striking feature of this group is

that they consider cash commitments in investments as only moderately important.

Past performance followed by investor services is the main selection criteria. But of

the three clusters investor rights and serVices is given lesser importance by this group.

Performance and cash commitment driven investors (Price'sensitive) This

group (41.58%) considers both performance and cash commitments as important

factors in the selection of mutual fund schemes. Compared to the performance only

driven investor this group gives higher importance to the other selection criteria

factors considered.
 FIGURE – 5.3
SELECTION CRITERIA CLUSTERS

5
Factor 1 Investor Rights and
4.5 services
4 Factor 2 Fund Management

3.5
Factor 3 Past experiences with
3 the fund family
Factor 4 Investment Objectives
2.5

2 Factor 5 Fund Management

Expenses
1.5 Factor 6 Cash Commitments
1
Factor 7 Performance And
0.5 Brand Name

Investor Grouping Combining Information Source and Selection Criteria

Clusters

The three information source (IS) groups and the three selection criteria (SC)

groups were formed from the same set of investors. We might expect the two sets of

groups to be interrelated such that membership of a particular information source

group is non randomly distributed among the selection criteria groups and vice versa

(capon et aI., 1992). The relationship between memberships in each of the two cluster

types was examined via a confusi9n matrix (Cross Tabulation) which is presented in

Table-5.l3. The confusion matrix resulted in the formation of nine combined

groupings. The nine groups are:

Group 1 ---Informed Believers

Group 2 --- Price insensitive Believers

Group 3 ---Price sensitive Believers

Group 4 ---Informed Passives

Group 5 ---Price insensitive Passives

Group 6 ---Price sensitive Passives

Group 7 ---Informed Thinkers

Group 8 ---Price insensitive Thinkers

Group 9 ---Price sensitive Thinkers.

 TABLE-5.13
DEMOGRAPHIC CHARACTERISTICS OF COMPOSITE INFORMATION SOURCE/SELECTION CRITERIA
GROUPS
Composite Information source / Selection Criteria Groups
No 1 2 3 4 5 6 7 8 9 Chi square Significance
Group size (Nos)
606 61 37 99 34 24 60 168 30 93 / FValue value
(10) (6) (16) (6) (4) (10) (28) (5) (15)
Marital Status (%) 83 70.5 75.7 80.8 82.4 91.7 88.3 85.1 76.7 89.2 27.372C 0.038*
married
Education (%) 50.366C 0.001*
School final 3 0 5.4 4 2.9 0 13.3 0.6 3.3 1.1
Grad 35.6 36.1 51.4 35.4 29.4 29.2 36.7 30.4 46.7 38.7
Post Grad 33.8 44.3 27 28.3 41.3 29.2 23.2 40.5 26.7 31.2
Professional 27.6 19.7 16.2 32.3 26.5 41.7 26.7 28.6 23.3 29
Income (%) 1.785f 0.077**
Upto Rs.20000 21.9 26.2 29.7 21.2 20.6 4.2 28.3 16.7 23.2 26.9
Rs.20001-30000 22.8 32.8 21.6 25.3 26.5 29.2 26.7 28 40 29
Rs.30001-40000 18 19.7 13.5 20.2 23.5 25 11.7 17.3 13.3 19.5
Above Rs. 40000 31.8 21.3 35.1 33.3 29.4 41.7 33.3 38.1 23.7 24.7

Denotes significance at 5 % level. *Denotes significance at 10 % level.

C indicates chi Square value; F indicates F value

Association of Combined Groups to Demographic Variables

The association between the combined groups and the SIX demographic

variables was examined with the help of chi-square and F test.

Table 5.14 reveals that of the six demographic variables studied only two

variables marital status (chi square = 27.372, P = 0.038) and education (chi square

50.366, p = 0.001) had a significant association with the 9 composite information

source/ selection criteria groups at 5% level Again an F test revealed that there is an

association between income levels and each of the nine investor groupings at 10%

level of significance (F=1.785, p=0.077). A study titled "Affluent Investors and

Mutual Fund Purchases" by Noel Capon et al came out with almost similar results

where it was concluded that only three of the six demographic variables -gender,

marital status and source of funds was significantly different across 4 investor groups

they studied.

The frequency distribution of the cross tabs reveals that informed investors be

they, informed believers, informed passives or informed thinkers are more likely to be

holding a post graduate degree. Price sensitive investors, be they, price sensitive

believers, price sensitive passives or price sensitive thinkers are more likely to be

graduates only. An interesting investor group is the price insensitive passives. They

are more likely to be professionals, most likely vis-a.-vis other investor groupings to

be married and be in the highest income group.

Association of Combined Groups to Fund Ownership Characteristics

The association between the combined groups and fund ownership

characteristics is studied using Chi square test using the application of cross tabs. This

is presented in Table 5.15.

 TABLE-5.14
Fund Ownership Characteristics of Composite Information
Source/Selection Criteria Groups
Composite Information source / Selection Criteria
Group size (Nos)
No Groups Chi
Sig
1 2 3 4 5 6 7 8 9 square/F
value
606 61 37 99 34 24 60 168 30 93 Value
(10) (6) (16) (6) (4) (10) (28) (5) (15)
% of Savigs in MF (%) 39.386C 0.025*
1-10 70.1 80 70 76 62 46 65 71 70 69
11-20 19.5 11 24 12 29 29 20 18 17 28
21-30 5.4 7 0 10 3 8 7 5 7 1
Above 30 5 2 5 2 6 17 8 6 7 2
No. of MF Houses (%) 38.99C 0.027C
1-2 49.3 48 49 36 32 29 32 51 53 62
3-4 25.9 23 27 19 32 21 45 24 27 24
5-6 8.3 11 11 10 9 17 8 7 7 3
More than 6 16.5 18 14 15 26 33 15 17 13 11
Purchase Method (%)
MF Office 4.29 20 14 10 12 17 12 20 20 19 NS
Online 52.48 5 14 1 9 21 0 4 7 1 64.542C 0.000*
IF As 16.67 48 51 64 62 21 65 52 37 46 44.394 C 0.007*
Banks 9.24 13 16 14 12 29 15 14 23 25 NS C
Dist Companies 0.00 11 5 9 3 13 7 11 13 9 64.787 C 0.008*
Investor Service 61.2 3 0 2 3 0 2 0 0 0 NS
Centers
Future Investments (%)
I Equity Schemes 61.2 62 54 63 79 67 58 63 53 55 194.68C 0.000*
In Income 23.6 20 11 23 17 17 12 28 40 30 18.398C 0.000*
Schemes
In Balance 17.7 11 14 18 21 21 17 20 20 13 12.654 0.000*
Schemes
Perceived Riskines
(T test) (%)
Equity Schemes 2.68 2.57 2.65 2.73 2.5 2.25 2.37 2.81 2.6 2.86 2.496F 0.011*
Income Schemes 3.22 3.20 3.14 3.21 3.82 3.17 2.92 3.37 3.3 3.32 2.366F 0.016*
Balance Schemes 3.18 3.28 3.05 3.15 3.06 3.13 2.82 3.30 3.17 3.30 1.961 F 0.028*
Fund Orientation
(F test) (%)
Equity 89.2 85 89 92 97 92 95 88 87 86 2.634 F 0.008*
Income 21.29 8 8 23 18 17 20 23 40 27 2.02 F 0.042*
Tax Saving 63.2 66 49 61 79 63 50 67 77 62 1.961 F 0.049*
Investment Objectives (F test) (%)
Safety f Principle 4.71 4.47 4.54 4.75 3.86 4.5 4.52 4.77 4.77 4.83 3.881 F 0.000*
Regular Income 3.35 3.44 2.86 3.36 3.26 2.58 3.31 3.49 3.37 3.44 3.881 F 0.000*
Tax Benefits 3.80 3.79 3.54 3.81 4.09 3.38 3.58 3.88 4.07 3.84 2.032 F 0.041*
Liquidity 4 4.13 3.73 3.86 3.82 3.79 3.72 4.30 3.63 4.04 2.295 F 0.000*
*Denotes significance at 5 % level. C indicates chi Square value; F indicates F value
 Significant differences are found across the nine composite information

source/selection criteria group for each of the seven measures of mutual fund

ownership characteristics studied. The nine groups differed with respect to the

percentage of savings in mutual funds, diversification among mutual fund houses,

likelihood of future investments in mutual funds, perceived riskiness of mutual fund

investments and importance attached to various investment objectives. With respect to

source of mutual fund purchase, significant differences were found with respect to use

of online method, IF As and distribution companies

Thinkers -informed, price insensitive, and price sensitive are more focused.

These investors invested predominantly in 1-2 mutual fund houses. The passives and

particularly the price insensitive passives were the least focused and 50% of them had

their investments spread across more than 5 mutual fund families. The perceived

riskiness of equity mutual funds varied a little across the 9 groups. Compared to the

other groups the informed passives and the price sensitive passives perceived

investments in income schemes to be more risky. The likelihood of future mutual fund

investments was considerably greater for the informed passives. The price sensitive

passives, price sensitive believers and informed passives are more likely to purchase

their mutual funds from an IFA and the price insensitive thinkers and the price

sensitive thinkers are less likely to purchase from IFAs. Online purchases are more

likely to be done by price insensitive passives. Among the 9 groups it is the price

insensitive thinkers who are oriented towards income schemes. It can be concluded

that the nine groups displayed distinctive mutual fund purchase behaviour and to a

somewhat lesser extent, had distinctive demographic characteristics. As such, they

may form the basis for specific strategic actions designed to secure mutual fund

business.
Conclusion

The study reveals that mutual fund investors can be meaningfully grouped on

the basis of similarities in both the use of information sources and selection criteria.

The resulting groups differ substantially from each other in terms of information

sources and selection criteria used in the investment decision Cross-tabulating the

information source and selection criteria groups produces a single set of composite

groups; these groups differ from each other in terms of both demographic

characteristics and mutual fund investment behaviour. The study has important

implications for investment managers as it has come out with certain interesting facets

of an individual investor. These market segments will provide insights valuable to

mutual fund managers for developing marketing strategies for their funds among

retail investors, thus improving the rate of mutual fund penetration. The words of

Morgan Stanley Dean Witter4, "In the end, not all asset management (mutual fund)

companies will survive, [but] for firms that have built a 'culture of excellence' over the

years, have segmented their customers efficiently, built brand, and delivered

performance, the ongoing opportunities to take market share have never been more

significant" has relevance in this context:

Endnotes

1. Capon, N., Fizsimons, G.J., and Prince, RA., 'An individual level analysis of

the mutual fund investment decision', Journal of Financial Services Research,

10(1), 1996, P 71.

2. Ibid., pp. 59-82.

3. CH, KPMG Report, "Indian Mutual Fund Industry -Future in a Dynamic

Environment, outlook for 2015" p.18, 2009.

4. Wilcox, Ronald T., "Bargain hunting or star gazing? Investors' preferences for

stock mutual funds", Journal of Business, 76 (4), 2003, pp. 645-664.

5. Capon, N., Fizsimons, G.J. & Prince, RA, op.cit p. 67.

6. Bala Ramasamy, Matthew C. H. Yeung., "Evaluating mutual funds in an

emerging market: factors that matter to financial advisors", International

Journal of Bank Marketing, 21(3),2003, pp.122-136.

7. Investment Company Institute., "Understanding Investor Preferences for

Mutual Fund Information", 2006, p.3.

8. Sirri, E. R, and P. Tufano., "Costly Search and Mutual Fund Flows," Journal

of Finance, 53, 1998, 1589-1622.

9. Ippolito, R, "Consumer reaction to measures of poor quality: Evidence from

Mutual Funds", Journal of Law and Economics, 35, 1992, pp. 45-70.

10. Niebling, Fabian, Meyer, Steffen and Hackethal, Andreas., "Whose Money is

Smart? Mutual Fund Purchases of Private Investors", February 15, 2009,

SSRN: http://ssrn.com!abstract=1343638>

11. Capon, N., Fizsimons, GJ., and Prince, RA., op.cit p. 67.