Investment Decision on Mutual Fund in Malaysia.
Design/methodology/approach: Questionnaire is distributed to 250 investor and potential investor in mutual fund. Statistical activity such as Descriptive, reliability and multiple regression analysis were used for gaining precise, concise and accurate data. All the data collection will be analyzing using SPSS or Software Package for Social Science.
Findings: The findings show that risk levels influence the investor to select mutual fund as their investment option. This is based on mutual fund characteristic where lowered level of risk as the key attraction of investors. Conventionally, investors are not just attracted to an investment because of its rate of return, but also the risks associated with it. Higher risk investments are perceived by investors as being very speculative which repels them away.
Originality/value: This study attempts to investigate and discover more about determinants (return on investment, level of risk, liquidity and financial literacy) of mutual fund investment in Malaysia.
Keywords: Risk, Mutual Fund, Return on Investment, Level of Risk, Liquidity, Financial Literacy
Investment is about committing or risking funds in anticipation of a return in the future. It can also be described as risking of funds with an expectation of growing it. Mutual funds for instance, is by far considered a safer or a lower risk investment as compared to shares or stocks (Arathy, 2015). Since the funds or investment is managed by a team, mutual funds are therefore considered an efficient and effective way of growing funds or maximizing returns. To minimize the ever-present possibility of losing funds or investment, it is important to diversify one's investment. Diversification of a portfolio is the top reason that motivates investors towards mutual funds investments. This is inspire of the fact most of the investors are not necessarily without savvy of investment, but rather just want to have a group of professionals handle their funds (Desai and Joshi, 2015).
Mutual funds play a crucial role in, not just prompting a healthy capital market, but also growing the economy significant in financial intermediation, (Hari and Ayappan, 2014). Stability in financial market indirectly follows the liquidity of the market when it is increased following the achievement of a healthier capital market. Fund manager is analyzing the investment criteria, according to investors' expectation. Meeting the expected outcome of the investment by the investor supersedes all other agendas hence the success of a mutual fund is measured by how well the investors' expectations have been met. The growth of mutual fund in Malaysia after 1990 was prompted by the government's commitment and the strong boost it gave through tax relief. This was achieved after the Malaysian government giving an incentive to investors use their Employee Provident Fund (EPF) to invest it in the mutual funds and was exempted of taxes. An analysis conducted by Abdul, F. and Kari (2007) on about 2,000 retired person in Malaysia show that the profit from their investments in the Employees Provident Fund (EPF) were insufficient to support and get them through their sunset years. Shanmugham (2000) findings show that psychological and sociological factors as opposed to economic factors have significant influence on investing the mutual funds. Previous literature was study on mutual fund performance (Galagedera and Silvapulle, 2002; Otten 2002; Fauziah and Isa, 2007; Low, 2007). Based on finance theory, high risk generates high return. Therefore, investors over the world will invest in the markets which can produce high returns to them, with the existence of high risk. However, in the real scenario, not all investors really exercise it. Investors have their own attitude regarding to their investment decision and not all investors are willing to take high risk in their investment. Malaysia has numerous types of investors with different kind of attitudes. Every decision that is made by investors towards investment activities are influenced by their own personal behavior. The emergence of behavioral finance in Malaysia continues as it can assists people, notably investors when they are enter into decision making on stock investments. Therefore, this study attempts to examine determinants (return on investment, level of risk, liquidity and financial literacy) of mutual fund investment in Malaysia and at the same time to fill the gap of previous studies.
Significance of the study
Result from this study is usable, not just to the mutual funds investors, but also to the public in general, governments as well as financial institutions. The study is of importance to financial institutions especially when they are conducting promotions on policies related to mutual funds. Additionally, it is important for asset managers to understand investors' behavior and reaction towards certain policies as well as ensuring success when faced with challenges or opening up to opportunities. Funds structures that cater for the varying preferences of the investors of mutual funds are designed for purposes of improving the performance of mutual funds. The respective information is necessary for the consumption of the investors. This gives them a clear picture of their investments and its worth. The findings of a study like this one are very advantageous and can be used by different parties including the researchers themselves, mutual funds companies, prospective investors, investors in the mutual funds, other researchers as well as the investment professionals. Investment professional can use the information and results from the study to determine what is lacking in the market and ways to improve their services. Additionally investors and prospective investors can acquire very important information on mutual funds from such researches. Readers in general can use the results of these studies for their own benefit, to further their knowledge as well as gain some skills on investment. Mutual funds startups can also learn a lot from such studies by examining the segments of the markets that are not satisfied or the problems that prospective and current investors are facing.
Literature Review Return Potential
Desai and Joshi (2015) have underscored this statement observing that the most admirable and popular feature of the mutual funds is their constant returns. This further means that mutual funds attract a huge following or investment by smaller investors who are looking to fetch bigger return with their small investments while at the same time taking low risk coverages through diversification. It is imperative for a mutual funds company to make their investors profits. Losses are hardly tolerated and they can be avoided through diversification of the investors' portfolios (Bogle, 1992). Studies have shown that mutual funds are preferable to most investor for their safety in terms of risks and their potential for returns (Hari and Ayappan, 2014). A survey conducted by Singh and Jiha (2009) on the tolerability of mutual investments underscored the findings of the previous studies that investors prefer mutual funds for their potential returns. Goel and Kumar (2014) found that potential of returns in mutual funds topped the list of these factors. The factor of return potential and its impact on the decision making process has been reiterated by various other writers and researchers like (Pellinen et al., 2015). Satish (2004) indicates that the preference of mutual funds among investors as compared to other products in insurance and banking sector can be accredited to their reasonable rates of returns. According to Kotishwar and Khan (2014), a return can be described as the profit or loss that an investment has gained over a given period of time, usually a year. The potential for returns is therefore the ability of an investment to give a positive return over a specified period of time, putting all other factors and variables into consideration. The ability of mutual funds to retain a constant return can therefore be described as the main feature of attraction to investors. H1: There is a relationship between return potential and mutual funds investment decisions.
Mutual funds are generically designed to mitigate risk levels by diversifying the investments across different portfolios (Saha and Dey, 2011). This lowered level of risk in the nature of mutual funds is described as the key attraction of investors. Conventionally, investors are not just attracted to an investment because of its rate of return, but also the risks associated with it. Higher risk investments are perceived by investors as being very speculative which repels them away. Investors need both a stable return as well as a minimal risk on their investment. Mutual funds happen to have both. It has very levels or rates of returns and at the same time very minimized risks. These reduced levels of risk are courtesy of diversification as well as management of the fund by professionals (Simons, 1998).
A risk factor include exchange rates, interest rates, commodity prices as well as indexes of stocks can influence the value of a given portfolio. Investments in mutual funds fetch more in returns than equity shares and bears significantly lower levels of risks as compared to equity shares (Sharma 2014). The level of risk acceptance varies from an investor to the other. According to Jagongo and Mutswenje (2014), there should be some form of compensation on the side of the investor, for assuming additional risk. This means that, the higher the level of risk or risk an investor is willing to take, the higher the rate of compensation or return. This hypothesis can be approved with speculations like gambling, where the levels of risks are very high, and the returns are also as high. Mutual funds are however significantly different from speculation. Diversification a very good practice to reduce risk levels and provides a safety net for an investor in the event of one company or industry underperforming. It is thus advisable that investor examines and reexamines their financial goals against their level of risk tolerance before they make financial decisions.
H2: There is a relationship between risk level and mutual funds investment decisions.
A liquidity investment style has been a recent trend where investors are investing more in less liquid mutual funds which results in greater returns (Idzorek et al., 2012). This style of investment is drawn from the assumption that the less liquid forms of mutual funds tend to fetch greater returns as compared to the more liquid forms of mutual funds' investments. However, the choice for the best mutual funds is guided, not just by the overall situation of the market, but also on the individual circumstance of the investor and the investment itself (Foran and O'Sullivan 2014). Today's market offers a wide range of liquidity features and products for an investor looking to venture into mutual funds. These liquidity features and products are very important in describing the behaviors of the outflow as well as the inflow of decisions to invest in mutual funds. In the event of redemption decisions, liquidity needs also affect mutual funds investors (Andrew et al., 2012). Based on the fact that mutual funds can be transacted on a daily basis, this means that investors are able to address their liquidity needs when they arise by freely moving their money in and out to address these needs (Bollen, 2006). This liquidity feature thus makes the mutual funds a very appealing form of investment where the investors are granted the liberty to do as they wish with their money. The downside to the liquidity feature is that investors require a very high restraint because some needs that can wait, can easily be addressed by transacting the funds. Most mutual funds companies charge a redemption fee as well as other affiliated charges to curb these unnecessary transactions. This works very well in discouraging the investors in the mutual funds from taking too much advantage of the liquidity feature (Bollen, 2006). In retrospect however, the liquidity feature in the mutual investments is designed to encourage or provide a loophole for the investors to create new funds or grow their already existing ones by depositing funds (Khorana and Servaes, 1999). Based on their current and growing popularity, the Securities Exchange Commission (SEC) made it a law that 85% of all portfolios of funds have to have the liquidity feature or must be invested in liquid assets. This means that they can be disposed or sold at any time in the event of a need arising. H3: There is a relationship between liquidity and mutual funds investment decisions.
Investors and prospective investors in mutual funds collect or gathr information on how to invest from brokers, consultants, financial advisers, financial institutions, financial articles and newspapers, the internet, financial magazines, school, etc (Arathy et al., 2015). Newspapers and magazines used to be a key source of investment information but with the coming of the internet, that information is now easily accessible on different credible websites as well as mutual funds companies' websites. Furthermore, investors can easily monitor the performance of their investment on different sites like the Securities Exchange Commission website. The internet has really changed the investment world as investors can now monitor their investments in real time (Arathy et al., 2015). However, newspapers and financial magazines are still a very influential part of investments as an information source. This is especially the case with the older segment of the investors demographic (Desi and Joshi, 2015). Many investors in mutual funds have often confessed that they had not invested sooner for lack of investment knowledge (Desi and Joshi, 2015). For first time investors who do not or might not have investment savvy, it is recommendable to hire a financial expert or a consultant to take you through on how to diversify the investment into varying assets to not just increase the return, also minimise the risks. A research conducted to determine the level or awareness among the mutual fund investors showed a very high level of financial and mutual funds illiteracy among these investors (Kumal and Goel, 2014). The main reason behind the high level of investment illiteracy is lack of publicly accessible information. This translates to the ability and willingness of investors and prospective investors as well as the rates of return on the investments made. The decisions to invest in mutual funds comes from both formal and informal influences as well as the information garnered from the mass media which includes magazines, financial articles, newspapers, financial journals, financial television channels like Bloomberg, etc. (Gupta and Chander, 2011). It is worth noting that financial literacy needs to be acquired carefully and from credible sources. This is due to its delicate nature. Wrong information from unreliable sources can result in great financial injuries as a result of poor or uninformed financial decisions.
H4: There is a relationship between financial literacy and mutual funds investment decisions.
Theory of Planned Behaviour
The planned behavior concept can be regarded as an extension of the reasoned action concept (Ali et al., 2014). An investor's or prospective investor's attitude and their perceived control of behavior is regarded to be directly related to that investor's decision to invest in mutual funds (Ali et al., 2014). The theory of planned behavior has been used in predicting investor decisions through the use of perceived control and previous behaviors, norms of the individual, ethics, individual principles as well as personal attitudes towards certain issues like investment. A research conducted in Malaysia and Germany on individual's willingness and ability to invest in mutual funds had fascinating results. Besides subjective norms and the individual attitude towards investment in the mutual funds, ability the individual to invest is also a key factor. The findings of the research in both countries matched the findings of the two previous researches where factors like pressure from social groups and society, perceived behavioral control as well as attitudes carry a significant and at the same time positive influence over an individual's decision to invest in the in mutual funds (Schmidt, 2010).
A primary data collection was used in this research to investigate the factors for Malaysian investor to make decision to invest in mutual fund. Questionnaire is distributed to 250 investor and potential investor in mutual fund. The returned data to the author is only 200. The questionnaires take roughly 20 minutes to fill. Additionally, the method is less likely to have errors since the questionnaire guides the respondents and prevents them from straying from the point. Likert A licket scale (5 point) is used for responses. Statistical activity such as Descriptive, reliability and multiple regression analysis were used for gaining precise, concise and accurate data. All the data collection will be analyzing using SPSS or Software Package for Social Science.
Result and Conclusion
Majority of the respondents are from age group between 18 and 31 years old, with 29.5 percent. There are two age groups (32-45 years old and 46 - 59 years old) which made up an equal proportion, each with 28.0 percent. The least number of respondents are from age group 60 years old and above, with only 14.5 percent out of 200 respondents. There are 51.5 percent of the respondents are female (103) whereas 48.5 percent (97) are male.
The composition ethnic of the respondents' ethnic in this study, the largest proportion is Chinese with 44.5 percent, follows by Malay with 24.5 percent and Indian with 19.0 percent. Other ethnics made up of 12.0 percent out of the 200 respondents. The marital status can be classified into three types, which includes: single, married and widowed. There are 118 respondents who are married. 66 respondents are single out of the total respondents. In the study, there are only 16 respondents who are widowed. For the monthly income level of the respondents. The highest monthly income level falls into two groups, which are RM1,501 - RM3,000 and RM3,001 - RM4,500, each with 30.5 percent respectively. 18.0 percent of the respondents own a monthly income level between RM4,501 and RM6,000, follows by 16.5 percent of the respondents who have a monthly income level of RM0 to RM1,500. There are a small percentage (4.5 percent) of respondents who own a monthly income level of RM6,001 and above. The most common education level attained by the respondents is Degree of a 74 respondents. 47 respondents are Diploma holders. 12.5 percent of the respondents have their education level falls in secondary school. 22 respondents are Master's holders while 14 respondents have their education level falls in primary school. Both Professional Certificate and Doctorate have the least number of respondents, with 10 and 8 respondents respectively. In fact, 51.0 percent of the respondents do invest in mutual funds in previous time whereas 49.0 percent of the respondents do not have their investment in mutual funds in the past.
Majority of the respondents - that is 59 respondents have their investment in mutual funds is to meet contingencies. 48 respondents who invest in mutual funds are to plan for their retirement. 38 respondents who invest in mutual funds are for the purpose of purchasing assets, follows by 30 respondents who plan for their children's education. There are only a small number of respondents (25 respondents) who invest in mutual funds just for the purpose of tax exemption. Most of the respondents, with 60 respondents get to know about mutual funds from the advertisement. 48 and 31 respondents tend to hear from friends and family respectively. However, 25 out of 200 respondents get to know mutual funds from the newspaper, 20 respondents get it from the Internet and 10 respondents get to know from the magazine. Based on the findings, there are four respondents who know about mutual funds from the bank whereas only two respondents know it from the class.
Reliability analysis in the study is used to measure the consistency of item. According to Hair, Anderson, Tatham and Black (1998), a Cronbach's Alpha value of 0.7 and above is considered as reliable.
Table 1 above illustrates the finding of the reliability test of the four independent variables. According to the table, it is clearly shown that the Cronbach's Alpha value for all independent variables are above 0.7. In fact, financial literacy has the highest ranking of Cronbach's Alpha of 0.899 while return potential has the lowest ranking of Cronbach's Alpha of 0.725. The second highest ranking is risk level with a Cronbach's Alpha value of 0.873 and the second lowest ranking is liquidity with 0.788. Since all the four independent variables exceed 0.7, the independent variables are indicated to be good and reliable.
Table 2 indicates the results of Pearson Correlation test. Based on the results, there are two independent variables with positive R value in which return potential has the highest value of 0.113, followed by financial literacy, the second highest value of 0.022. Liquidity and risk level has a negative R value, with -0.034 and -0.169 respectively. The results shows that there is a positive relationship between return potential and mutual funds investment decisions. Moderate positive relationship can be explained by the variables between financial literacy and mutual funds investment decisions. On the other hand, there is a strong negative relationship between both liquidity and risk level and mutual funds investment decisions.
Multiple Linear Regression Analysis
Multiple linear regression is to examine the impact of independent variables toward dependent variable.
Table 3 illustrates the model summary of multiple linear regression analysis. The R value in the model is 0.238. The R square value is 0.057. This shows that there are 5.7% of the total variance in dependent variable can be explained by the model of four independent variables.
Table 4 indicates the ANOVA table. Based on the findings above, all the independent variables (return potential, risk level, liquidity and financial literacy) and dependent variable (mutual funds investment decisions) are significant as the p-value, 0.022 is less than 0.05.
Table 5 indicates that return potential is not significant towards mutual funds investment decisions in which a t-value of 1.459 and p-value of 0.146. Hence, H1 is not supported. The result is contradicting with the survey conducted by Kumar and Goel (2014) where they found potential return is a factor for investor to invest. Hence, many of the funds are underperformed as compared to the benchmark. The researcher concludes that Malaysian' investors do not depends on the return potential while making mutual funds investment decisions. On the other hand, risk level has a significant relationship with mutual funds investment decisions. The t-value is -2.923 and p-value is 0.004 (p-value < 0.05). People who invest in mutual funds are affected by the risk level. The lower the risk level, the more the investors will invest in mutual funds. This results is consistent with the previous study of Saha et al. (2011), mentioning that lower risk level would increase the popularity of mutual fund. Hari et al. (2014), mentioning that risk factor tend to have influence on the mutual funds investment decisions among investors. In other words, investors who invest in mutual funds are affected by the risk level. Mutual funds investors would prefer funds which meet their risk acceptance and risk capacity levels as proposed by Hari et al. (2014). The researcher concludes that Malaysian investors tend to consider the risk level while making any mutual funds investment decisions. Therefore, H2 is supported. Liquidity is not significant towards mutual funds investment decisions. It has a t-value of -0.550 and p-value of 0.583. Investors who invest in mutual funds are not for the purpose of liquidity concern. According to Kumar et al. (2014), the withdrawal facilities in mutual funds are the least to be considered as well. The researcher concludes that mutual funds investors in Malaysia do not depends on the liquidity factor in making their mutual funds investment decisions. Therefore, H3 is not supported. Lastly, financial literacy is found not significant towards mutual funds investment decisions as well in which the t-value is 1.610 and p-value is 0.109. Due to the fear of losing financial resources, investors are refused to invest in mutual funds. In fact, they will gather the information from all available sources such as newspaper, prospectus and financial magazine in order to get the most accurate financial information regarding the funds. Kumar et al. (2014) mentioned prospectus and newspaper is an important medium to deliver the financial information. Mutual funds investors tend to refer to the sources while making investment decisions rather than deciding on their own. The researcher concludes that Malaysian investors are not equip with financial literacy when making their mutual funds investment decisions. Thus, H4 is not supported.
From the results of the study, factors which influence investor decision to select mutual fund as an investment options is only risk level. This is based on mutual fund characteristic where lowered level of risk as the key attraction of investors. Conventionally, investors are not just attracted to an investment because of its rate of return, but also the risks associated with it. Higher risk investments are perceived by investors as being very speculative which repels them away. Investors need both a stable return as well as a minimal risk on their investment. The benefits of mutual fund investment must be highlighted to attract more investors. The mutual fund investment firms should redesign mutual fund products to suit Malaysian investor perception to be more attractive in order to entice them to invest in mutual fund. However, this research had some limitations and needs to be improve. The respondents were only from the 3 cities in Malaysia, namely Malacca, Johor and Kuala Lumpur. The number of respondents was relatively small compared with the number of investors in the Malaysian capital market as a whole. The research method only used questionnaires therefore, further research should use in-depth interviews to better understand the thoughtful of respondents towards mutual fund. Lastly. The framework developed need to be incorporated with more investor behaviour.
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Nur Baiti Shafee
Faculty of Business, Multimedia University, 75450 Melaka, Malaysia.
Shadia Suhaimi (*)
Faculty of Business, Multimedia University, 75450 Melaka, Malaysia. Email: firstname.lastname@example.org
Zuraina Sal Salbila Mohamed
Faculty of Business, Multimedia University, 75450 Melaka, Malaysia.
Accounting Department, Universiti Tenaga Nasional, 26700 Pahang, Malaysia
Table 1: Reliability Analysis Independent Variables Cronbach's Alpha Return Potential 0.725 Risk Level 0.873 Liquidity 0.788 Financial Literacy 0.899 Table 2: Pearson Correlation Coefficient Analysis Mutual Funds Investment Decisions Correlation Coefficient (R) Return Potential 0.113 Risk Level -0.169 Liquidity -0.034 Financial Literacy 0.022 Table 3: Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 0.238 0.057 0.037 0.40275 Table 4: ANOVA Model Sum of Squares Mean 1 Regression 1.904 df Square F Sig. Residual 31.63 4 0.476 2.935 0.022 Total 33.535 195 0.162 199 Table 5: Regression Analysis Standardized Coefficients Model Std. Error Coeficient t Sig. (Constant) 0.346 12.265 Return Potential 0.068 0.104 1.459 0.146 Risk Level 0.053 -0.239 -2.923 0.004 Liquidity 0.065 -0.042 -0.550 0.583 Financial Literacy 0.056 0.141 1.610 0.109
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|Author:||Shafee, Nur Baiti; Suhaimi, Shadia; Mohamed, Zuraina Sal Salbila; Nawang, Dasilah|
|Publication:||Global Business and Management Research: An International Journal|
|Date:||Apr 1, 2018|
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