chapter 1 introduction -...

CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION

Financial requirement of an individual finds no boundaries. Every

individual aims at maximizing the flow of income from whatever source

possible. The most interesting activity undertaken by an individual to fulfill

this objective is to undertake investing. It is a very interesting activity which

attracts people from all walks of life irrespective of their occupation,

economic status, education and family background. Investment means

employment of funds on assets with the aim of earning of income or capital

appreciation. The two main factors that influence investment decisions are

time and risk. Investment is the allocation of money to assets that are

expected to yield some gain over a period of time. The main criteria for

investment are the expected return, risk involved, and liquidity of investment

the different activities, but the common target in these activities is to

wealth. Funds to be invested come from assets already owned, borrowed

money and savings. By foregoing consumption today and investing their

savings, investors expect to enhance their future consumption possibilities by

increasing their wealth.( V K Bhalla, Investment management: Security

analysis and portfolio management, S Chand & co. ltd, 8th edition, Pg 3-15)

An individual who commits money to investment products with the

expectation of financial return is termed as an investor. Generally, the

primary concern of an investor is to minimize risk while maximizing return.

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Meaning of Portfolio

Portfolio is a combination of securities which include debt and

equity. The combination of debt and equity is necessary because debt provide

assured opportunities whereas equity gives higher returns but with an element

of uncertainty. Therefore in a portfolio, combination of debt instrument and

equity is important to compliment each other.

1.2 PORTFOLIO MANAGEMENT

The professional management of various securities (shares, bonds

and other securities) and assets (e.g.,real estaste) in order to meet specified

investment goals for the benefit of the investors is known as portfolio

management. Investors may be institutions (insurance companies, pension

funds, corporations, charities, educational establishments etc.) or private

investors (both directly via investment contracts and more commonly

via collective investment schemes like mutual funds etc.

1.3 REASON FOR INDULGENCE IN PORTFOLIO

MANAGEMENT

Earlier investment in portfolio was confined to rich and business

class. But in recent times it has become a common activity. The increase in

interest of people towards portfolio management can be attributed to the

following reasons:

1. Increase in working population which paves way for larger

income which in return results in higher savings. Amount of

savings is the main factor in investment.

2. Provisions of tax incentives in respect of investment in

specified channels.




3. Availability of large and attractive investment alternatives

4. Availability of investment to provide income and capital gain

5. Increase in investment related publicity

6. Increase in the tendency of people to hedge against inflation

1.4 FACTORS THAT INFLUENCE INVESTMENT DECISIONS:

Investors have various needs to cater to. This induces them to

invest in various avenues which comprises of different types of securities.

While taking an investment decision the investors decide about the following:

1. The amount of money needed for investment.

2. The time span during which the money will be needed.

3. Assets that should be purchased.

4. The proportion of the total money that should be reinvested in

each particular asset.

5. The frequency of portfolio evaluation.

6. The most economical source of obtaining the required sum of

money.

Since the concept of portfolio has gained momentum in recent

times, the investors have a wide range of choice available with regards to

what to invest in. Investment should be in a combination of securities which

includes shares, debentures, bonds, fixed deposit, PPF, NSCs, post office

deposits, life insurance policies, mutual funds etc. The choice will depend on

whether the investor will depend on assured returns and safety of funds or

capital appreciation etc.




1.5 TECHNIQUE OF PORTFOLIO MANAGEMENT

Investment management also known as portfolio management is

not a simple activity as it involves many complex steps:

Specification of investment objectives & constraints

Investment needs to be guided by a set of objectives. The main

objectives taken into consideration by investors are capital appreciation,

current income and safety of principal. The relative importance of each of

these objectives needs to be determined. The main aspect that affects the

objectives is risk. Some investors are risk takers while others try to reduce

risk to the minimum level possible. Identification of constrains arising out of

liquidity, time horizon, tax and special situations need to be addressed.

Choice of the asset mix

In investment management the most important decision is with

respect to the asset mix decision. It is to do with the proportion of equity

shares or shares of equity oriented mutual funds i.e. stocks and proportion of

bonds in the portfolio. The combination on the number of stocks and bonds

depends upon the risk tolerance of the investor. This step also involves which

classes of asset investments will be placed and also determines which

securities should be purchased in a particular class.

Formulation of portfolio strategy

After the stock bond combination is chosen, it is important to

formulate a suitable portfolio strategy. There are two types of portfolio

strategies. The first is an active portfolio strategy which aims to earn greater




risk adjusted returns depending on the market timing, sector rotation, security

selection or a mix of these. The second strategy is the passive strategy which

involves holding a well diversified portfolio and also maintaining a pre-

decided level risk.

Selection of securities

Investors usually select stocks after a careful fundamental and

technical analysis of the security they are interested in purchasing. In case of

bonds credit ratings, liquidity, tax shelter, term of maturity and yield to

maturity are factors that are considered.

Portfolio Execution

This step involves implementing the formulated portfolio strategy

by buying or selling certain securities in specified amounts. This step is the

one which actually affects investment results.

Portfolio Revision

Fluctuation in the prices of stocks and bonds lead to changes in the

value of the portfolio and this calls for a rebalancing of the portfolio from

time to time. This principally involves shifting from bonds to stocks or vice-

versa. Sector rotation and security changes may also be needed.

Performance Evaluation

The assessment of the performance of the portfolio should be done

from time to time. It helps the investor to realize if the portfolio return is in

proportion with its risk exposure. Along with this it is also necessary to have a




benchmark for comparison with other portfolios that have a similar risk

exposure.( Robert A strong, Portfolio management handbook, Jaico Pub

House, Ed194, Pg 85-88)

1.6 STRATEGIES OF PORTFOLIO MANAGEMENT:

Portfolio management strategies are of two types- Active portfolio

management strategy and Passive portfolio management strategy.

ACTIVE MANAGEMENT STRATEGY (Aggressive

investment strategy):

Active management is holding securities based on the forecast

about the future. It is a strategy followed by aggressive investors who strive to

earn superior returns, after adjustment for risk. This strategy involves

investing in high return high risk investments with the sole purpose of

maximizing return from investments. It involves allocating major portion of

portfolio capital to invest in equities, equity based funds and highly volatile

markets. Investors following aggressive investment strategy often look for

comparatively short-term profiting and wish to invest more in growth stocks,

and small caps and mid cap stocks.

PASSIVE MANAGEMENT STRATEGY (Defensive

management strategy):

Passive management is a process of holding a well-diversified

portfolio for a longer term with the buy and hold approach. Passive

pt to construct a portfolio that

resembles the overall market returns. This strategy is just opposite of

aggressive investment; its purpose is to preserve the capital and ensure some

return from investments. It involves investing in low profit low risk

investments like bonds, money market funds, treasury notes, and equities with




minimum price volatility and good dividends. Defensive investors look for

long-term profits and/or monthly earnings. Advantages of defensive

investment strategy include reduced risk, predictable income, better

investment planning and diversification of portfolio. This strategy mainly

suits beginners. Disadvantages include low return from investments and

requirement of high capital investments. (Prasanna Chandra, Investment

analysis & portfolio management, Tata McGraw hill pub Co.ltd, Pg 493-

497)

1.7 NEED FOR THE STUDY

In contrast to olden days when family businesses were dominating

the economy, the liberalization of economy has paved way for many

businesses to enter the field of competition. With the impact of globalization,

companies are now into intense competition. Diversification of business has

become order of the day. Such expansion decisions have made the companies

to mobilize funds from the public. For this purpose, companies issue

securities in various forms like shares, debentures, bonds etc. General public

has various avenues to invest their funds and they choose an avenue which

satisfies their needs by giving maximum returns on investment, security of

funds and social security. Investing is simple but not easy. Investors always

want to make sure that the funds are invested and managed effectively as it is

their hard earned money. Investing in securities such as shares, debentures, and bonds is

profitable but involves a great deal of risk. In such investments both rationale and emotional

responses are involved. Investing in financial securities is considered as one is most

risky as well. Therefore creation of a portfolio helps to reduce risk, without sacrificing

returns. Portfolio management deals with the analysis of individual securities as well as with

the theory and practice of optimally combining securities into portfolios. An investor who

understands the fundamental principles and analytical aspects of portfolio management has

a better chance of success. An investor considering investment in securities is faced with the problem of choosing from

among a large number of securities and the manner in which is to be allocated over this




group of securities. He is also faced with the problem of deciding which securities to hold

and how much to invest in each. The investor tries to choose the optimal portfolio taking

into consideration the risk return characteristics of all possible portfolios.

But this investment decision of the investors does not remain rigid

for a long period and the composition of the portfolio keeps changing due to

various reasons. The main reason for changing the investment decision is

fluctuation in prices of stock. This is mainly influenced by goodwill of the

company, the returns it gives to the investors etc. but in recent times various

scam and rift in family business have shaken the stock market and the crises is

yet to be overcome. Such incidents induce the investors to reconsider their

investment decisions. This study is an attempt to find out the factors that are

considered to make investment decision and the factors that cause the changes

in the investment decision.

1.8 BRIEF REVIEW OF LITERATURE:

Review of past literature reveals that risk perception of investors is

influenced by behavioral factors like over confidence, regret aversion,

expectations, cognitive dissonance influence the investment decisions( eg.

Gong-Meng Chen,Kenneth A. Kim,John R. Nofsinger, Oliver M. Rui, 2005).

In spite of experience in investment behavioral mistakes still continue(eg

Markus Glaser & Martin Weber ,2007). Gender too influences the investment

preferences and demand for corporate social responsibility information is

more on the part of female investors. For investors to achieve goals hybrid

form of active and passive portfolio is preferred. Corporate social

responsibility of the company plays an important role in investment decisions.

Females demand more for CSR information(eg Ann L. Owen,Yejun Qian ,

September 2008 ). Mood of the investors influences the investment decisions.

Investors prefer equities in their portfolio as it outperforms bonds (eg Elroy

Dimson, and Mike Staunton , 2003). Positive risk attitude signifies high




allocation in equities in portfolio which declines after retirement. Trading

strategy is changed by investors after experiencing regret. Investment

decision is influenced by past return consistency of stock. The two main

factors considered for investment decisions is maturity period and cost of

investment (eg Chang woon nam, Doina maria radulescu ,Feb 2004).

Investment decisions are based on experience. Through the experience

investors gain greater knowledge but the investing skills deteriorates due to

age factor. Investment decisions are also influenced mostly by quick returns,

that the influence of professional advice is much less. Internationalization of

financial information encourages foreign investments. Better educated

investors exhibit greater investment skills (eg Petra Halling, December 2009).

Investment decision is also effected by genetic composition and family

environment. The investment decisions are taken to satisfy the expectations of

the investors.

Investors consider trading history to adjust stock trading to improve

portfolio performance. Over diversification is indulged into expecting to

expectation is not satisfied due to failure to follow the measures induced

continuously.

1.9 GAP IN RESEARCH

The review of past researches indicates that the factors which

mostly influence the investment decisions of investors are of behavioral

pattern. These decisions are mostly effected by psychological biases and are

result of past experiences. Knowledge with regards to stock exchange policies

and financial reforms with respect to various investment avenues has been

ignored. Therefore in order to narrow down this gap, an attempt has been

made to study the impact of in- depth knowledge pertaining to these




investment avenues on investment decisions and the investment behavior of

investors based on such knowledge. To get a better understanding of the

to know about the investment avenues, investment objectives, factors

after adopting the techniques and strategies.

1.10 OBJECTIVES OF THE STUDY

To study the socio-economic profile and investment avenues

of investors.

To examine the techniques of investors and its influence on

awareness and satisfaction.

To analyze investors awareness and strategies towards the

capital market investment portfolios.

towards the specific investment avenues.

To analyze the influence of demographic profile, investment

and satisfaction.

To find the relationship between techniques and strategies of

investors in the study domain.

1.11 HYPOTHESIS




The study was commenced to test the validity of the following

assumptions relating to the evaluation of the investment portfolio of investors.

(i) The risk tolerance of investors does not differ significantly

with respect to different investment portfolios.

(ii) The investors do not differ in their awareness level with

respect to select investment portfolio.

(iii) The factors influencing investment satisfaction of investors do

not differ significantly.

(iv) There is no influence of demographic variables, investment

satisfaction.

1.12 RESEARCH METHODOLOGY

Pilot study and Pre-testing

A preliminary investigation was undertaken by surveying 100

investors through random sampling method to identify the demographic

The purpose of the pilot study was to test the validity of the variables in the

questionnaire and to confirm the feasibility of the study. Preliminary

investigation was conducted in different parts of Chennai. The Cronbach

alpha method was applied. This method is useful to measure the reliability

and validity of the questionnaire through the coefficient which depends upon

the variance in the perception of investors. The Cronbach alpha value was

found to be 0.924 which is statistically significant at 5 per cent level. It was

oint scale of the questionnaire are

highly reliable and the samples satisfy the normal distribution rationally. Thus

the research instrument proved valid for further study.




Main Study

The data was collected by means of a five section questionnaire.

The Profile of the investors was dealt in Section I. Section II enumerates the

Overall investment portfolio followed by Risk tolerance in the III Section.

The IV & V section identifies awareness and satisfaction level of investors.

Part I & II of the questionnaire is designed in optional type, where as Part III

consists both optional and 5 point scale. Part IV & V comprises statements in

-point scale. The questionnaire with a covering letter was personally

administered to each and every respondent. The respondents were requested

to return the fielding questionnaire after 15 days. The respondents took a time

period of 15 days to 2 months to revert back the completed questionnaire.

Data Collection Procedure

The data collection started with segregating the region of study viz.,

Chennai into North Chennai, South Chennai, East Chennai and West Chennai.

This was done to ensure better region coverage and to receive quality data

from sample with diverse characteristics. North Chennai and South Chennai

comprises of predominantly high number of potential investors, owing to the

development it has witnessed during the last decade. On the other hand, East

Chennai and west Chennai has not grown comparatively and the hence the

proportion of potential investors is relatively less. In addition, more number

of banks and mutual fund institutions are established in North and South

Chennai, enhancing the availability of products to customers. As such, the

data collection segregated on the basis of region ensured that the random

sample has quality sample data to arrive at meaningful conclusions.

Sample Size

A sample size of 623 respondents was taken for the study on a

random sampling basis. Among the 623 respondents to whom it was




administered only 514 respondents reverted back the filled in questionnaire.

Out of this only 500 of them were found to be suitable for analysis and study.

The study covers investors from selected parts of Chennai city. Hence, the

exact sample of the study is 500.

Data Analysis

Primary data was collected through a formal questionnaire

administered to the respondents to identify the awareness, involvement, and

evaluation of the investment portfolios. Reliance was also placed on the

secondary data made available on the subject and also the research of similar

studies conducted in the same area. The references of secondary data were

also made from published works like books, journals, reports, magazines,

dailies and also through various websites. The data collected from both the

sources were scrutinized, edited and tabulated. The data is analyzed using

statistical package for social sciences (SPSS) and other computer packages.

The statistical tools that were used in this study are Parametric t-test, One-

way analysis of variance, Factor analysis, K-means cluster analysis, Multiple

discriminant analysis and Non-parametric chi-square analysis.

1.13 SCOPE OF THE STUDY

Investment Portfolio management is essential to keep the

investment fabric intact. The idea Portfolio management is regarded as the

response of the financial markets to investor consensus. It relates to the

promotion of better investment in the direction of positive contribution to

value creation.

The present empirical study attempts to know the profile of

investors and analyze the characteristics of the investors.




products and the satisfaction of various services rendered by

the providers.

The study tries to unravel the influence of demographic

factors like gender age etc, on risk tolerance level of the

investors.

The study is confined to select investment products.

1.14 LIMITATIONS OF THE STUDY

The total number of financial instruments in the market is so large

that it needs a lot of resources to analyze them all. There are various financial

institutions providing these financial instruments to the public. Handling and

analyzing such a varied and diversified data needs a lot of time and resources.

Thus the limitations of the study are as follows:

The study takes into consideration only five asset types, which

find a prominent place in the portfolio of any investor. Any

additional asset type might alter the results.

The Sample size was limited to five hundred investors.

The respondents were mostly from the middle and lower

income groups.

Reluctance of investors to provide complete information about

their investments can affect the validity of responses.

Due to time and cost constraint, study is conducted in only

selected area of Chennai city.

Lack of knowledge of investors about the financial

instruments can be a major limitation.




Information can be biased due to the use of questionnaires.

The study is limited by the research period.

CHAPTER SCHEME

Chapter I Introduction Contains a brief description of the study,

Statement of the problem and is concluded with Scope,

Objectives, Limitations and Methodology.

Chapter II Review of Literature - Deals with the related work done

by different authors, Book Reviews, Journal references,

Working Paper citations and Industry Publications.

Chapter III Conceptual Framework - Deals with Theoretical and

Conceptual Framework of investment behaviour and the

profile of investment products in the portfolio of investors.

Chapter IV Analysis of investment preference and techniques

deals with an analysis of primary data with the help of

statistical tools.

Chapter V

investment focuses on the multivariate statistical analysis

of the primary data.

Chapter VI Conclusion - Summarizes the findings along with

suggestions to the investors for framing their investment

strategies.

CHAPTER 2

REVIEW OF LITERATURE




Portfolio management is an investment game which has to be

played in a very prudent manner. An investor, before making an investment

decision should know his preferences based on which decision regarding the

portfolio is taken. After the portfolio preference is defined the investor

decides regarding the type of investment to be made. This investment decision

is influenced by various factors. To know if the portfolio investment is made

pertaining to these various aspects of portfolio management have been listed

out below:

Investment preference possess multifarious evidences demanded by

investors from past and to expect best returns in future. The pre dominant

factors safety and security of investment is vital for all investors when they go

for investment. Many investors expect their investment to work hard to fetch

maximum return in shorter time and to be multiplied in the long term

approach. Much national and international literature indentified various

preferences of investors as shown below:

Michale Dowling and Brian Luceyin (March 1999) state seven

common mistakes made by investors which are Trading too much, Investing

based on image, Following the crowd, Not diversifying, Knowing best,

,Following share price trends, and Ignoring the lessons of history

Cori E. Uccello (April 24,2001) state that spouses do not coordinate

their investment decisions to share risks. Instead, most of the spouses invest

similarly. In particular, the asset allocations of one spouse are highly

correlated with the asset allocations of the other spouse, even after controlling

for other factors. It is found that married households determine an overall

investment strategy, which each spouse then implements in the same way.




Victor Ricciardi (July 20,2004) states that

perception of risk for different types of financial services and investment

products is influenced by the role of feelings, influence of worry, notion of

perceived control, significance of expert knowledge, overconfidence, concern

of potential losses, overall perceived riskiness of a sock, overall perceived

return of a sock and significance of investment time.

Gong-Meng Chen,Kenneth A. Kim,John R. Nofsinger, Oliver M.

Rui (2005) have stated that Chinese investors exhibit behavioral biases (i.e.,

they seem overconfident, inclined toward a disposition effect, and exhibit a

representativeness bias) and make poor ex post trading decisions. Investors

are often unable to overcome behavioral biases.

Giiven Sevil, Mehamet Sen, Adullah Yalama (2007) have

investigated the decision process of small investors in Istanbul stock

exchange. Their study is based on four main concepts of behavioral finance

namely Expectation theory, regret aversion (a decision taken in past yields

disastrous results and if the effect of gratification is equal to the pain the

investor is not affected y emotions in decision making), over confidence and

cognitive dissonance (theory of consistency where decisions are not changed

by the investors and to reduce the pain of regret they convince themselves that

their decision had been rational). The study was concluded on a note that the

investors are not totally rational as is believed in traditional finance theory.

Apart from considering what should be done what is already done should also

be considered.

Petko S. Kalev, Anh H. Nguyen, Natalie Y. Oh (2007) state that

foreign investors tend to choose stocks with international profiles and

transparent information. They outperform the local investors with regards to

global sock. Excluding the global stock, local investors earn better. In the

medium and long term, local investors have stronger performance.




Markus Glaser & Martin Weber (2007) have documented biases

of individual investors. Inexperienced investors are not able to give a reasonable self-

assessment of their own past realized stock portfolio performance which

impedes investors' learning ability. Investors are hardly able to give a correct estimate of

their own past realized stock portfolio performance and that experienced investors are

better able to do so. In general, we can conclude that we find evidence that investor

experience lessens the simple mathematical error of estimating portfolio returns, but seems

not to influence their 'behavioral' mistakes pertaining to how good (in absolute sense or

relative to other investors) they are.

Angela Lyons, Urvi Neelakantan, Erik Scherpf (march2008) have

attempted of find answers for quarries like difference between the investment

and wealth management practices of men and women, disparities in wealth

across gender and marital states on account of risk tolerance, the impact of

control over wealth on the bargaining power within the household which in

turn influences the financial planning decisions. It is stated that the risk

tolerance important factor in making investment decisions. Women may

generally understate their risk tolerance and their observed preference for

more conservative investments may result from a lack of financial knowledge.

Thus, before recommending overly conservative portfolios to women, there is

a need to better educate women about the risk-return tradeoff and help them

make more informed choices. Men need to be cautioned about the pitfalls of

trading excessively, which leads to a fall in investment returns. Women need

additional guidance on how to make investment choices that carry a certain

amount of risk so that there is sufficient growth in their savings.

Vanita Tripathi (May 15,2008) examines the perceptions,

preferences and various investment strategies in Indian stock market reveal

that investors use both fundamental as well as technical analysis while

investing in Indian stock market. Size of the firm, market equity, price

earnings ratio, and leverage etc influences stock prices. The investment




strategies in Indian stock market are buying stocks for which some good news

is expected, buying stocks which are expected to announce bonus issue,

momentum strategy, size strategy and following investment behaviour of

FIIs.(foreign institutional investors).

JingYu Zhang (September 2008) states that both approaches have

its strengths and weaknesses. Investors who do not bother about the past and

look forward achieve their goals. Active and passive investing serves for

different clients with different risk exposures. Both strategies could results in

higher gains for investors. The development of the hybrid form of active and

passive portfolio management is needed for investors to achieve their goals.

Jasim Y. Al-Ajmi (2008) indicate that Men are less risk averse than

women, Less educated investors are less likely to take risk. Wealthy investors

are more risk tolerant than the less-

declines when they have more financial commitments as well as when they

are approaching towards their retirement age or are retired..

Ann L. Owen,Yejun Qian (September 2008 ) state that

demographic characteristics as well as non-financial motives play an

important role in deciding whether or not to consider SRI products. Female

investors, those who actively participate in religious groups, and those who

consider the societal impact of their purchases as consumers are more

interested in the social aspects of the companies they invest in. individuals

who expect to leave inheritance are also consider corporate social

responsibility in investment decisions.

Leda Nath, Lori Holder-Webb, David Wood , (feb12,02009) state

that Different attitudes and values among individuals may lead to unique

preferences for which type of information is preferred in decision making,

while different attitudes and values among groups may lead to differences




between social categories in information preferences. The gender differences

affect the demand for corporate social responsibility information in terms of

content and format. Females possess structural differences in their

investment-making decision information preferences compared to males.

Females exhibit higher demand for CSR information than do men; they also

exhibit greater demand for streamlining of the information flow.

R. A. J. Campbell, C. G. Koedijk, F. A. de Roon (feb 19, 2009)

state that investors tend to integrate the personal and social values into the

portfolio management process.. The emotional assets, art, wine, stamps,

atlases and books show positive excess return over the period. There is

significant divergence in the behavior of the various price indices to enable an

investor to benefit from holding a diversified portfolio of these emotional

assets. Investors are willing to give up some risk adjusted returns in favor of

some emotional value.

Raluca Bighiu Qawi (april 30,2010) attempts to understand the

behavior of investors and biases and effect of irrational decisions over market

performance due to psychological reasons like unconscious herding behavior(

as a results of genetic setup), risk taking capacity of the investor and risk

aversion attitude, investor sentiments etc. Factors such as cash availability and

optimism, effect of past performance over future uncertainty, social

responsibility in investment decisions and influence of analysts also influence

the decisions of the investors.

Enrico Maria Cervellati, Pino Fattori , Pierpaolo Pattitoni(may

also stated that the numer of trading activity is more for men, people who

have higher income and those who use internet for trading. The job type also

determines the trading decisions. Self-employed individuals make more

trading transactions.




Gabriele M. Lepori (oct 2010) states that mood swings of the

investors affects the decisions of the investors. It is stated that some

environmental factor (e.g.sunshine, hours of daylight, sports results, aviation

disasters, etc) is responsible for generating mood changes in a large fraction

of the investor population, which in turn translate into changes in risk

aversion and/or optimism and affect portfolio choices. Positive mood induces

people to behave more cautiously and avoid risk, especially when the stakes

are high and large losses are possible, in order to preserve their good

emotional states..

Dennis Dittrich, Werner Güth, BorisMaciejovsky (dec 2010) state

that overconfidence increases with the deviation of actual from optimal

investments, indicating that the less accurate their investment decisions are,

the more prone are participants to exhibit overconfidence. Overconfidence is

more pronounced in the more complex combinations of assets. Investors who

believe that their life is largely controlled by external factors are less often

classified as overconfident. Males are less prone to overconfidence than

females.and age is negatively correlated with overconfidence.

Syed Tabassum Sultana (2010) has attempted to discover the

relationship between a dependent variable i.e., Risk Tolerance level and

independent variables such as Age, Gender of an individual investor on the

basis of the survey. It has been concluded that investors prefer to park their

funds in avenues like PPF/FD/Bonds next to Equities and Mutual Funds

scheme. Most of the investors get their information related to investment

through electronic media (TV) next to print media (News paper/ Business

risk tolerance level. The individual investor still prefers to invest in financial




products which give risk free returns. This confirms that Indian investors even

if they are of high income, well educated, salaried, independent are

conservative investors and prefer to play safe.

Helen Brown-Liburd, Valentina L. Zamora (January 2012) have

investigated how a company s higher or lower level of CSR investment

(either top or bottom industry ranking) and the presence or absence of CSR

assurance affect an investor s judgments about the company. It is found that

higher investment in CSR influences the stock price revisions as did the

investors fairness perception of CSR and assurance services did have an

effect when the disclosed CSR information was most positive (i.e., higher

CSR investment).

Nik Maheran Nik Muhammad (anonymous) state psychological

biases affect investor behavior and prices. The most common behavior that

most investors do when making investment decision are Investors often do

not participate in all asset and security categories, individual investors exhibit

loss-averse behavior, Investors use past performance as an indicator of future

performance in stock purchase decisions, Investor trade too aggressively,

Investors behave on status quo, Investors do not always form efficient

portfolios, Investors behave parallel to each other, and Investors are

influenced by historical high or low trading stocks. However, there are

relatively low-cost measures to help investors make better choices and make

the market more efficient.

Studies reveal that risk perception of investors is influenced by

behavioral factors. Behavioral biases like over confidence, regret aversion,

expectations, cognitive dissonance influence the investment decisions.

Experience in investment may reduce mathematical errors but behavioral

mistakes continue. Gender too influences the investment preferences where

female need to be educated about risk- return trade off and warn men against




excessive trading. Investors indulge in fundamental and technical analysis

before deciding about investment. For investors to achieve goals hybrid form

of active and passive portfolio is preferred. Corporate social responsibility of

the company plays an important role in investment decisions. Females

demand more for CSR information. Mood of the investors influences the

investment decisions. These sorts of preferences compel the investors to go

into the domain of portfolio preference to choose proper investment.

After preferring the investment avenues returns and risk in

investment, it is difficult for investors to prefer the best portfolio to yield

maximum returns. The investment satisfaction are also preferred at this point

of inception itself but it purely depends upon the portfolio preference.

Portfolio preference

Portfolio preference of the investors is influenced by the return

expected by them and the desire to take risk. The composition of portfolio

reflects the intention the investors and his investment strategy. This strategy

changes with advancement in age and experience according to the change in

needs. The studies below show the portfolio preference of investors and the

factors that influence the portfolio preference:

Elroy Dimson, and Mike Staunton (2003) state that Equities has an

important role in long-term portfolios. Though he risk is high, equity

outperforms bonds, bills in terms of returns. To maximize the probability of

favorable real returns, equities should be held within a diversified portfolio.

Matallín-Sáez, Juan Carlos and Fernández-Izquierdo, Angeles

(2005) analyses the effect of passive timing in the application of

measurements. This effect is produced when a portfolio which is not managed

actively shows signs of instability in its level of systematic risk. It was found




that the effect of passive timing creates bias in the application of

measurements used to evaluate market timing ability. It was also found that a

negative relationship exist between the selection of individual assets and

market timing.

Elias Alanko (2009) finds that the attitude of Finnish investors

towards risk is very risk averse but having a high allocation in equities and

having debt signifies positive risk attitude. The risk attitudes of investors

increase until retirement after which the risk attitude starts declining.

Prachi Deuskar, Deng Pan, Scott Weisbenner, Fei Wu (February

2012) have investigated the effect of regret on future decisions in the context

of stock-trading strategies by individual investors. It is found that people are

more likely to change their trading strategy, i.e., whether to place a desperate

or patient order, after experiencing regret over their most recently submitted

order. The emotionally-charged decisions made because of regret lead to

worse outcomes for investors, with the poor returns resulting from these

decisions lasting for at least few months.

Angela M. Warnerton, (anonymous) states that for successful

investment, it is necessary that investors should understand the need for an

investment strategy. Investors should make specific choice of securities and

must decide whether the want to invest in specific type of securities or in

varied ones. Over diversification should be avoided. After deciding on what

to invest, investors must gather information about the securities and develop a

research strategy. Decision must be taken as to how much amount is to be

invested. Then a portfolio has to be built and periodically reviewed.

Investors prefer equities in their portfolio because even though the

risk is high, equity outperforms bonds. Passive timings create bias in portfolio

management. Positive risk attitude signifies high allocation in equities in




portfolio which declines after retirement. Trading strategy is changed by

investors after experiencing regret. Portfolio management requires the

investors to understand the need for investment strategy.

After the investment preferences are decided upon, the investors

struggle to make a decision about investment. In order to choose an optimum

portfolio, investors take various investment decisions based on numerous

factors.

Investment decisions

Investment decisions of investors are influenced by numerous

factors like biases, past experiences (positive and negative). The decisions do

not remain consistent for long duration. As expectations and need changes,

investment decisions also change. The composition of portfolio depends upon

the investment decisions. Many studies reveal the manner in which investors

take decisions and the factors that influence these decisions. Some of these

studies are as follows:

Boyce D. Watkins (July 2003) investigate whether past return

consistency is used as a predictor of future returns. Positively consistent

stocks are considered riskier than stocks that do not have such consistency.

Negatively consistent stocks are argued to be less risky. It is found that for

holding periods of one month or less, positively consistent stocks (those

stocks that have had positive returns for 2/3 of the 6 or 12 day pre-investment

period) have lower future returns and negatively consistent stocks have higher

future returns. This effect holds when controlling for momentum, firm size,

and share turnover of the given security. The returns to interactive portfolios

tend to be twice as high as those from any momentum portfolio formed, and

roughly 20% higher than the most profitable consistency portfolio. Interactive

portfolios are profitable for 80% of all holding periods measured.




Chang woon nam, Doina maria radulescu (Feb 2004) study the

relationship between maturity period and cost of investment. The selection of

maturity years can play a significant role in reducing costs related to the debt-

financed investment. The optimum debt maturity is correlated positively with

the corporate tax rate but negatively with the interest rate.

Brian M. Lucey ,Michael Dowling(2005) conclude that Small

investors are more likely to allow feelings to affect their decision-making as

the decision-making process is characterized by greater uncertainty for them

than for the professional investors who dominate the pricing of large stocks.

Greater uncertainty has been linked with greater use of feelings in the

decision-making process. Investors spend a substantial part of their leisure

time discussing investments, reading about investments, or gossiping about

behaviour would be influenced by social movements.

George M Korniotis , Alok Kumar (march 20,2006) examine

investment decisions of older individual investors. According to their study

investment decisions of older individual investors and experienced investors

are more likely to follow "rules of thumb" that reflect greater investment

knowledge. However, older investors are less effective in applying their

investment knowledge and exhibit worse investment skill, especially if they

are less educated, earn lower income, and belong to minority racial/ethnic

groups. The adverse effects of aging dominate the positive effects of

experience. Older investors' portfolio decisions reflect greater knowledge

about investing but investment skill deteriorates with age due to the adverse

effects of cognitive aging.

Edwin J. Beinecke, Ravi Dhar, George Rogers Clark (2006) state

that the motives for trade are based upon a belief in the value offundamental

research and a belief in the importance of past price trends. Investors on




average believe that markets over-react to news announcements. Many

investors buy stocks they believe to be over-valued on the anticipation that the

share prices would continue to rise.

Hussein A. Hassan Al-Tamimi (2006) has identified the most and

the least influencing factors on investor behavior. The six factors that

influence the investors are: expected corporate earnings, get rich quick, stock

creation of the organized financial markets. Five factors that influence the

least are: expected losses in other local investments, minimizing risk,

expected losses in international financial markets, family member opinions

and gut feeling on the economy.

Milan Lovric, U.Kaymak, J.Spronk (2008) states that investment

decisions are seen as a process of interactions between the investor and the

investment environment. This investment process is influenced by a number

of interdependent variables and driven by dual mental systems, the interplay

of which contributes to rational behavior where investors use various

heuristics and may exhibit behavioral biases.

Ralph Blethergen, Andreas Gottschalk, Andreas Hackethal (2008)

focus on the general question of whether honest or deceptive financial advice

is likely to be more pervasive. Results indicate that, while both forms are

prevalent, it cannot be ruled out that financial advisory services provide net

benefits for some investors. The clients advised are older, wealthier, more risk

averse and more likely to be female investors who can be assumed to face

higher costs for information acquisition are more likely to rely on financial

advice. For these investors financial advice enhances (international) portfolio

diversification. Financial advice enhances portfolio diversification. However,

since advice comes at a cost in the form of increased portfolio turnover

accompanied by relatively higher transaction fees.




investors

understand their lack of knowledge and ability to obtain and analyze the

financial data and use on-line brokers mainly to invest into exchange traded

mutual funds that track market indices. It is found that the investors invest

more in stocks with extremely high or low short-term realized returns, invest

more in stocks with higher short-term realized returns, and invest more in

stocks with lower long-

such as risk, P/E ratio and dividend yield, have no significant effect on the

investment decision .Significant number of investors use momentum

investment strategies based on the short-term realized stock returns and

contrarian strategies based on the long-term realized stock performance. The

investors do not change their momentum and contrarian strategies over time.

Ralf Gerhardt, Andreas Hacketha(2009) have investigated the

financial advisors on household portfolios: A study on private investors

state that the effect of investment advice

is less than what is generally assumed.

Dan Amiram (2009) investigates the association between the

globalization of financial information, specifically defined as the use of

international accounting standards, and foreign investment decisions. It is

found that foreign investments are higher for countries that use international

accounting standards. Foreign investors have statistically and economically

higher holdings of foreign equity portfolio investments (FPI) in countries that

use international accounting standards especially when foreign investors are

from countries that also use international accounting standards. It is also

stated that countries with lower corruption and better investor protection

experience larger benefits, in terms of FPI increase, from the use of




international accounting standards than other IFRS (international financial

reporting standards) users.

Oleg Badunenko, Dorothea Schäfer (2009) state that gender

differences in portfolio choices cannot be attributed to differences in risk

tolerance between the two groups. Males and females invest equal shares of

their wealth to risky financial assets, gender differences in portfolio choices

cannot be attributed to differences in risk tolerance between the two groups.

Financial advice should be provided in accordance with individual risk

preferences of individuals rather than to be based on the stereotypical believes

Abhijeet Chandra (Nov 2009) state that individual investors do not

always make rational investment decisions. Their investment decision making

is influenced by behavioral factors like greed, fear, cognitive dissonance,

mental accounting, overconfidence, repetitiveness and anchoring etc. These

biases play an integral role in -making.

Petra Halling (December 2009) examines whether better educated

investors make smarter investment decisions and exhibit greater investment

skill than less educated ones. It also analyzes how the education of individuals

influences the general stock investment performance as well as excess

trading, under diversification and the home bias phenomenon. It is found that

older investors and traders with a university degree achieve a better stock

investment performance than less educated and younger individuals. Better

educated investors display a lower stock turnover rate.

Amir Barnea, Henrik Cronqvist, and Stephan Siegely, (2010) state

an individual's genetic composition is an important determinant of the

individual's investment behavior. While the nature is an important

determinant of an individual's investment behavior, there is also considerable




environmental influences. It has been found that the non-shared environment

tends to be much more important than the shared environment in explaining

the cross-sectional variance in investment behaviors. The family environment,

i.e., nurture, does have a significant effect on the investment behavior of

young individuals, but this effect is not long-lasting. It disappears when an

individual gains own experiences.

Alen Nosic, Martin Weber ( 2010) analyze the determinants of

investors' risk taking behavior. Risk taking behavior is affected by an

individual's risk attitude and by his / her subjective perceptions of risk and

return. Determinants of risk taking behavior not only vary between

individuals but also between investments. Overconfidence (i.e.

miscalibration) has an impact on risk taking behavior.

M.Kannadhasan (April 2010) state

characteristics on risk analysis in strategic investment decisions. It is

organization possess relatively restrictive perspective and a limited

knowledge base in considering various alternatives while making decisions.

The individuals with longer tenures being associated within a firm shows a

decline in the amount of information gathered and processed because they

develop a set of habits, establishing routine information sources, and rely on

past experiences.

Arvid O. I. Hoffmann, Hersh Shefrin, Joost M. E. Pennings( 2010)

strategies impact the portfolios they select and the returns they earn. It is

found that investors driven by objectives related to speculation have higher

aspirations and turnover, take more risk, judge themselves to be more

advanced, and underperforms relative to investors driven by the need to build

a financial buffer or save for retirement. Investors who rely on fundamental




analysis have higher aspirations and turnover, take more risks, are more

overconfident, and outperform investors who rely on technical analysis.

Joseph F. Brazel, Keith L. Jones, Rick C. Warne (September 2010)

their perception of the frequency of fraud occurrence, the importance they

place on fraud risk assessment. A positive relation is found between investor

reliance on financial statement information and the importance of fraud risk

assessment becomes stronger as investor perceptions of the rate of fraud

increase. Investors who perceive fraud risk assessment as an important

activity appear to act on these perceptions. A positive association exists

of fraud red flags (e.g., analyses of accruals, management turnover) when

making investment decisions. Investors tend to focus on pending litigation,

violations of debt covenants, and high management turnover.

Ken Little (anonymous) state investors remember the sour feelings

of losing money in an investment more acutely than making the same amount

of money in a winning investment. Emotions play a very impotant role in

investment decisions because they trump logic unless one has a plan that is

prepared in advance and commit to stick with regardless of what else is

happening. Emotional investors usually make all the wrong decisions for all

the wrong reasons. The safest way is to plan a sell strategy before buying a

stock. It is necessary to decide at what point the investment cannot be held

longer and mark that as selling point. There is emotion attached to money and

there is no escaping that fact. Investors can minimize the influence that

emotions play on investment decisions by planning the exit strategy even

before the stock is bought. .

Investment decision is influenced by past return consistency of

stock. The maturity period and cost of investment has a significant role in




decisions. Small investors allow feelings to affect their decisions. Investment

decisions are based on experience. Older investors reflect greater knowledge

about investing but investing skills deteriorates with age. Reacting to news

announcements investors buy stock which they believe to be over valued.

Investment decisions are influenced the most by quick returns, past

behavior. Studies also reveal that the influence of professional advice is much

less than what is assumed. Internationalization of financial information

encourages foreign investments. Risk tolerance in investment decision is not

much influenced by gender differences. The psychological factors influence

the investment decisions of a person. Better educated investors exhibit greater

investment skills. Investment decision is also effected by genetic composition

and family environment. The investment decisions are taken to satisfy the

expectations of the investors.

After investment decision is made the investors are driven to take

certain steps to achieve their investment objectives which range from

maximum returns to maximum satisfaction pertaining to various factors.

Therefore after making the investment decisions the investors analyze the

various that lead to maximum satisfaction.

satisfaction for which, at times, the investors indulge into over diversification.

The composition of portfolio aims at satisfy the various needs of the investors

which could be maximum returns, security of funds, social security or a

combination of any of these. The studies below show the investors

expectation and factors influencing their satisfaction:




Gina Nicolosi, Ning Zhu (March 2004) state individual investors

adjust their stock trading according to their stock selection abilities, which is

inferred from their trading history. Trading experience helps in improving

portfolio performance. Particularly, as an investor completes more purchase

transactions and purchases more unique stocks, the portfolios subsequent risk-

adjusted monthly return is higher. Individual investors (despite making

numerous documented mistakes) learn from their own trading experience,

adjust their stock purchases accordingly, and achieve higher portfolio

performance.

Arianna Spina Pinello (Ma y 2007) state that investors make

adjustments to analyst forecasts to reduce perceived biases in analyst

pectations relative to analyst forecasts

produce an asymmetrically strong reaction to positive vis-à-vis negative

reported earnings surprises. Investor reaction to changes in their earnings

expectations reveals loss aversion. Biases in analyst forecasts do not persist

in investor expectations. Differences between investor expectations and

analyst forecasts produce an asymmetry in the reaction to positive vis-à-vis

negative reported earnings surprises that reverses when the earnings surprise

is measured as perceived by investors.

Arvid Hoffmann in his investment survey (November 2007)

indicates that besides financial needs, the investors strive to satisfy more

socially oriented needs through investing. These investors identify themselves

with other investors and enjoy participating in investment-related

conversations

George Y. Wang1 and Yu-Ting Yang (2007) state that over-

diversification potentially incurs marginal costs for reasons like over-

diversification is increases monitoring costs of portfolio management as the

staff of fund management is mostly minimized to only necessary manpower.




Over-diversification increases transaction costs as fund managers have to

routinely rebalance the portfolio according to stipulated investment strategy.

Including of too many stocks in a portfolio dilutes, or even distorts, the fund

-linear

relationship exists between portfolio performance and portfolio size in terms

of the number of stocks.

Dennis Vrecko, Thomas Langer (Dec 23, 2009) investigate the

strength of preference for customized distributions. For investors with specific

risk preferences, further customization provides additional value. It has been

found that most investors have a strong preference for customization and

many are willing to pay so much for such customization that dominance

violations result. On average, investors do not act skewness seeking during

customization and investors are strongly willing to pay for additional

flexibility even though the actual benefits of customization vary largely by the

individual.

Nidhi Walia, Dr. Mrs. Ravi Kiran

expectations and identify the parameters that account for their dissatisfaction

with regards to mutual funds.Despite higher ROI, many fund schemes fail and

results in dissatisfaction among investors because the measures introduced are

not followed continuously .Most of mutual funds concentrate to improve the

return they could provide to investors without paying any attention to quality

of services expected by investors. Mutual fund industry should design

innovative designed schemes that can assure them not only the financial

benefits but also value added quality services.

Investors adjust stock trading based on trading history with an

confidence. Investors strive to satisfy more socially oriented goals through




investment. Over diversification is indulged into expecting to spread the risk.

satisfied due to failure to follow the measures induced continuously.

GAP IN RESEARCH

The review of past researches indicates that the factors which

mostly influence the investment decisions of investors are of behavioral

pattern. These decisions are mostly effected by psychological biases and are

result of past experiences. Knowledge with regards to stock exchange policies

and financial reforms with respect to various investment avenues has been

ignored. Therefore in order to narrow down this gap, an attempt has been

made to study the impact of in- depth knowledge pertaining to these

investment avenues on investment decisions and the investment behavior of

investors based on such knowledge. To get a better understanding of the

to know about the investment avenues, investment objectives, factors

cons

after adopting the techniques and strategies.




chapter 1 introduction -...

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