A Study of Investors perception towards

Mutual Funds in the City of Kathmandu

A
Proposal

Submitted to
Central Department of Management, Tribhuvan University, Kirtipur
in the partial fulfillment for the requirement of Master’s Degree of
Business Studies

By

........................
Manisha Chaudhari
Roll No: 252
16 September, 2020
Contents
1 Background of the study 1

2 Problem Statement 4

3 Objective of the study 5

4 Rationale of the study 5

5 Limitations of the study 6

6 Literature Review 6

7 Methodology 9
7.1 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

7.2 Population and sample . . . . . . . . . . . . . . . . . . . . . . . . . . .9

7.3 Sources of Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.4 Data Collection and Processing Procedure . . . . . . . . . . . . . . . .10
7.5 Data analysis tools and techniques . . . . . . . . . . . . . . . . . . . .10

8 Chapter Plan 10
1 Background of the study
The history of mutual fund dates back to 19th century when it was introduced in Europe, in
particular, Great Britain. Robert Fleming was set up in 1968 the first investment trust called
Foreign and Colonial Investment Trust which promised to manage the finances of the
moneyed classes of Scotland by spreading the investment over a number of different stocks.
This investment trust and other investments trusts which were subsequently set up in
Britain and the US, resembled today’s close – ended mutual funds. The first mutual in the
U.S., Massachusetts investor’s Trust, was set up in March 1924. This was the open – ended
mutual fund. The stock market crash in 1929, the Great Depression, and the outbreak of the
Second World War slackened the pace of mutual fund industry, innovations in products and
services increased the popularity of mutual funds in the 1990s and 1960s [ CITATION DrK13
\l 1033 ]. The history of mutual fund in Nepal is not long. It was started with the
establishment of NCM mutual fund -2050 established by NIDC capital market. The fund
was initially open-end type with Rs 10 par value. It was converted into close end fund in the
name of NCM mutual fund 2059. The fund has 10 million units outstanding with Rs 10 par
value, and 10 year maturity period. The fund has guaranteed at least 5 percent return to its
investors. It listed in Nepal Stock Exchange (NEPSE) (Pudel, et. al. 2016).

In this era of globalization and competition, the success of an industry is determined by the
market performance of its stock. The investors too like to invest only in the stock of those
companies from which they can get maximum gains. In early years of growth of mutual
fund industry, investors were available only with few investment avenues to invest their
money. But with the passage of time a lot of opportunities are available to the investors for
investing their money in different investment channels. One such channel is to invest in
mutual fund along with effective financial management. Mutual funds have seen a
tremendous growth in the last few years. This is the result of combined efforts of the
brokerage houses and the fund managers who come to one’s rescue by educating the
investors and making them aware of the mutual fund schemes by different modes of
promotion [ CITATION Sai11 \l 1033 ]. Especially in a country like Nepal, investment from
financial organizations or even an individual has a great impacted on the overall economy
of the country. For the past few decades, the major investment opportunities have emerged
to give us proper financial results (i.e, collection of the investment and generation of profit
from the invested capital) are Hydro-electricity generation, Tourism and Agriculture. Even
though there are other sectors and opportunities to invest time, capital and labor in these

3
 three are the most effective and productive in the long run. There are very few people in
Nepal who solely invested in high amounts. So for country like Nepal, one of the major
sources of investment is mutual fund.

Mutual Funds are a retail product which is designed for those who do not directly invest in
the share market because of its unpredictable and volatile nature. Mutual funds are
recognized as a mechanism of pooling together the investment of unsophisticated investors
which are professionally managed by fund managers for consistent return along-with capital
appreciation and has come as a much needed help for retail investors [ CITATION 15AS \l
1033 ]. All investments whether in shares, debentures or deposits involve risk. Share value
may go down depending upon the performance of the company, the industry, state of
capital markets and the economy. While risk cannot be eliminated, but skillful management
can minimize the risk. Mutual Funds help to reduce risk through diversification and
professional management. The experience and expertise of Mutual Fund managers in
selecting fundamentally sound securities and timing their purchases and sales help them to
build a diversified portfolio that minimizes risk and maximizes returns.

2 Problem Statement

In conventional financial theory, investors are assumed to be rational wealth maximizes,

following basic financial rules and basing their investment strategies purely on the risk-return
consideration as the factors expected to influence investment decisions (Baker et al, 1977).
Traditional economic theory assumes that people are rational agents who make decisions
objectively to take advantage of the opportunities available to them. Investors think of
themselves as rational and logical. But when it comes to investing, their demographic factor,
emotional inclinations, ingrained thought patterns and psychological biases, color how they
perceive the world and how they make decisions. The controversy of this area of study was
the different findings that researchers came up with. For instance, Sing (2012) stated that
there is no association between age, occupation and attitude towards mutual funds. But there
is an association between sex, income, educational qualifications and attitude towards mutual
funds. As far as the benefits of the mutual funds are concerned, return potential and liquidity
have been perceived to be most attractive by investors, followed by flexibility, transparency
and affordability. Kumaret al. (2014) study concludes that as far as the demographic factors
4
are concerned, geography, age, occupation and income have significant influence on choice
of investment decisions in mutual fund. Joseph & Joseph (2015) study reveals that the
investors’ perception is dependent on the demographic profile and assesses that the investor’s
age and annual savings have direct impacted on the investors’ choice of investment but not
other demographic factors like gender, occupation, educational level and educational
background. Subramanya (2015) concluded that the socio economic factors like age, gender,
education, income and savings of investors’ perception towards mutual fund is not
encouraging but the age of investors’ and saving habit of respondents is correlated. Hence,
the mutual funds investor's perception are different according to their demographic variables
like age, gender, income, saving and educational background. Therefore, the study deals with
following issues.
 What are the investor’s perceptual factors towards the mutual fund in Kathmandu
City?
 What are the most important factors that investor perceive towards mutual fund
investment?
 Is there any significant difference between demographic factors and perception
towards mutual fund investment? (Demographic factors are age, gender, income level,
educational background, education level, annual saving and occupation).

3 Objective of the study

The overall purpose of this study is to examine investor’s perception towards mutual funds.
The specific objectives of the study as follows:

a) To explore the investors perceptual factors towards mutual fund.

b) To identify the most important factors that investor perceive towards mutual fund
investment.
c) To explore whether there is any significant difference between demographic factors
and perceptual factors towards mutual fund investment.

4 Rationale of the study

Mutual fund is a retail product design to target small investors. It is evident that
mutual funds have at the top of the agenda over the last decade thus, constituted the
majority of many organizations’ portfolios. They have become worldwide
5
 phenomena and attached great importance to global financial markets. Nowadays,
an increasing number of investors are relying on mutual fund as investment and
retirement vehicles. Hence, designing a mutual fund product and expecting a good
response will be futile.

The better understanding of investors’ perception and outcomes is important for

financial planners because an understanding of how investors generally respond to
market movements. It helps investment advisors devise appropriate asset allocations
strategies for their clients. Companies would identify the most influencing factors
on their investors’ perception which affect their future policies and strategies
eventually would affect their future plans. Similarly Government would identify the
most influencing factors on investors’ perception would affect the required
legislations and additional procedures needed in order to satisfy investors’ desires
and also to give more support to market efficiency. In this context, the present study
is very useful and relevant to examine the factors influencing the perception of
investors, while making decisions related to mutual fund investments and the
features that investors look for in mutual fund products.

5 Limitations of the study

Every study is guided under certain limitation but the researcher has tried to include all the
necessary information for the conduct of the study as far as possible. Followings are some
limitations under which this study has been conducted:

6 Literature Review
The term review of literature is very important for the researcher or investigator in the area
of concerned stock market and economic growth. This is related to the present study with
a view to find out what had already been explained and how the present research adds new
dimension to the study. It is an integral and mandatory process in research work. In this
part, focus has been made on the conceptual framework and the review of literature that is
relevant regarding to the stock market and economic growth. In this regard, various books,
journals and articles concerned to this topic have been reviewed. Review of literature is
based on available literature in the field of research. Every possible effort has been made
to grasp knowledge and information that is available from libraries; document collection
center helps to take adequate feed back to broaden the information to study.
The link between financial stock market and economic growth becomes the field of
research more and more explored.All economists do not hold similar opinions regard- ing
6
the importance of the financial system for the economic growth. Kunt and Levine (1996)
pointed outthat various conceptual arguments emphasize the potentially posi- tive, neutral
or even negative implications of stock market development for economic growth. Many
analysts view stock market in development countries as ”casinos” that

7
have little positive and potentially a large negative impact on economic growth. Other
analysts argue that because not much corporate investment is financed through the issuance
of equity, stock markets are unimportant for economic growth. As economies develop,
self-financed capital investment first gives way to bank- intermediate debt finance and later
to the emergence of equity markets as additional instruments for raising external funds.
Financial structure the mix of financial intermediaries and markets-changes as countries
develop, as illustrated by differences in financial struc- ture across countries and across
time for individual countries. Levine (1991) argued that stock markets may affect
economic activity through the creation of liquidity. Many profitable investments require a
long-term commitment of capital, but investors are often reluctant to relinquish control of
their savings for long periods. Liquid equity markets make investment for long periods.
Liquid equity markets make investment less risky and more attractive because they allow
savers access to their savings quickly and cheaply or when savers want alter their portfolio,
they can easily do it. At the same time, companies enjoy permanent access to capital raised
through equity issues. By facilitating longer-term, more profitable investments, liquid
markets improve the allocation of capital and enhance prospects for long-term economic
growth. Yarkey and Adjasi (2007) argued that emerging economies are faced with
financial constraints which are due to underdeveloped nature of the financial system. The
relationship be- tween financial development and economic growth has been extensively
studied in last few decades. Goldsmith (1969) empirically tested the relationship between
financial sector development and economic growth by using the cross country data of 35
coun- tries and indicated the positive relationship between the two variables. Levine and
Zervous (1996) empiricallyevaluated the relationship between stock market develop- ment
and long run growth by using data of 24 countries over the 1976-1993 periods. They used
stock market size and liquidity as the proxies of stock market development; and logarithm
of initial per capita GDP and the logarithm of the initial secondary school enrollment rate
as proxies of long run economic growth. Their study revealed that stock market
development is positively associated with economic growth. Habib and Khan (2004)
empirically tested the relationship between financial development and economic growth of
Bangladesh during 1975 to 2002. They used money stock to GDP, private sector credit to
GDP, and domestic credit to GDP ratios as the indicators of financial development. Their
study indicated a causal direction from economic growth to financial development in
Bangladesh. Tahin (2008) examined the causality between economic development and
financial development in Pakistan covering the data for the period 1973 to 2006 by using
Johansen’s multivariate co-integrating procedure, and found a casual direction from
economic development to financial development in the
long run. Boubakari (2010) used Granger Causality test proposed by Granger in 1969 for
testing statistically causality between stock market development and the economic growth
by using economic and financial time series data from 1995 to 2008 of some European
countries Belgium, France, Portugal, Netherlands and United Kingdom. This study
indicated that the stock market development does significantly ”Granger Cause” economic
growth in France and United Kingdom. Moreover, it was found that stock market
development does ”Granger Cause” but not significantly the economic growth of
Netherlands. However, this study also found negative relationship between stock market
development and economic growth for Belgium and Portugal. This study also pointed out
the findings of Nowbusting (2009) that indicated stock marketdevel- opment is an
important ingredient for growth in Mauritius. The causality has been observed only in the
countries where stock market is significantly active and highly liquid. Kharel and Pokhrel
(2012) empirically tested the role of financial structure in promoting economic growth of
Nepal during 1994-2011 by employing Johansen’s co- integrating vector error correction
model. They indicated that the banking sector plays a key role for economic growth
compared to capital market in Nepal. Bayar, Kaya and Yildirim (2013) examined the
relationship between stock market development and economic growth in Turkey during the
period 1993-2013 by using Jahansen-Juselins co-integration test and Grangr Causality test
and indicated that there is a long run relationship between economic growth and stock
market capitalization, total value of stocks traded, turnover ratio of stocks traded. They
also indicated that there is uni- directional causality from stock market capitalization, total
value of stock traded and turnover ratio of stocks traded to economic growth. Mohabbad
(2013) investigated the causal relationship between stock market development and
economic growth for Jordan for the period 2000-2012 using a vector Error Correction
Model (VECM). His study found unidirectional causality between stock market
development and economic growth with direction from stock market development to
economic growth. Moreover, Granger co-integration indicated that all t-statistics are
significant indicating long-run relationship between the variables. Osaskwe and Ananwde
(2017) applied the Autore- gressive Distributive Lag (ARDL) model to investigate the co-
integration relationship between stock market development and economic growth by using
data of Nigeria from 1989 to 2015. They used real gross domestic growth rate as proxy of
economic growth, and market capitalization ratio of GDP and turnover ratio as
indicatorsof stock mar- ket development and indicated both short run and long run
association between stock market development and economic growth in Nigeria. Bista
(2017) examined the em- pirical relationship between stock market development and
economic growth of Nepal for the period 1993 to 2014. He used real GDP per capital as
proxy of economic growth
and market capitalization of Nepal stock exchange (NEPSE) as proxy of stock market
development. His study indicated a unidirectional causality from stock market devel-
opment to economic growth in Nepal. Baral (2019) applied the bi-variate analysis by using
simple regression model to examine the relationship between stock market de- velopment
(measured by size and liquidity of the stock market) and economic growth (measured by
logarithm of capital GDP at constant price) in Nepal during the pe- riod 2007-2017. His
study indicated a significant positive relationship between them, and it also indicated that
variation in economic growth is explained by stock market development of Nepal.

7 Methodology
7.1 Research Design
The primary objective of this study is analysis relationship between stock market and
economic growth. A researcher has collectd the valuable data and suitable informa- tion
relating to stock market and economic growth to achieve the objectives. It has adopted the
descriptive,co-relational and analytical research design. However, for the purpose of
analyzing the relationship between the variables of stock market develop- ment and
economic growth, co-relational research design is used.It is also chosen to investigate the
causality between stock market indicators and growth indicators. The study covers the 8
year time period between the fiscal year 2010/2011 to 2018/2019 for the purpose of testing
causality between various stock market indicators and growth variables.This research was
designed as to give a clear picture of the relationship bew- teen stock market and
economic growth with the help of available data and with some valuable suggestions and
recommendations.

7.2 Population and sample

As this study is about the contribution made by the stock market in the economy, time
period of the study will be 2010/2011 to 20018/20019.This is related to the main part of
the study. Since the study has been totally confined to the relationship between stock
market and economic growth,population and samples are same.
7.3 Sources of Data
To achieve the main theme of the study, the secondary data has been used. The main
sources of the secondary data are annual reports,survey and other sources. The major
sources of secondary data are as follows:
• Trading reports of NEPSE.
• Annual reports of SEBON.
• Economic survey, Fiscal Year 2018/19 (Government of Nepal, Ministry of Finance
2019)
• Nepal Rastra Bank’s Economic Report.
• Previous research studies and dissertations.
• Articles and journals available in different library.
• Central bureaus of statistics.
• Different Websites.

7.4 Data Collection and Processing Procedure

Essential financial data have been collected from different offical webside of the com-
pany. Data used for the study has been collected through annual reports, trading reports,
economic survey, NRB economic report, published books and journals, bul- letins and
magazines. The collected data has been proceed as per the need of the study. These data
were grouped in different tables and charts according to their nature.

7.5 Data analysis tools and techniques

There are different tools and technique for analysis of data. In this study various re- lated
tools and techniques have been used for this purpose. Trend analysis, correlation analysis,
regression analysis, econometric models, and other statistical tools have been used for the
analysis. The empirical results have been estimated in the study by using annual data for
the year 2010/2011 to 2018/2019 period.

8 Chapter Plan
The whole study has been divided into five major chapters. These are as follows:
Chapter I: The first chapter ’Introduction’ deals with background, a brief overview
of stock market, problem ststement, objective of the study, rationale of the study and
limitation of the study.
Chapter II: This chapter introduces the conceptual frameworks, review of literature and
research gap.
Chapter III: This chapter includes research methodology, it deals with research de- sign,
population and sample, sources of data, data collection and processing procedure and data
analysis tools.
Chapter IV: This chapter concern with data presentation and analysis. This is the core
part of the study. Collected data are presented in the tabular and other forms. Different
statistical presentations are used for analysis the collected data from different sources.
Final results are obtained after analysis of data by using different financial and statistical
tools and techniques.
Chapter V: This chapter is the last chapter of the study. It includes the summery of the
study, conclusion, finding and some recommendation.

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