An Analysis of Investors behavior while making investment decision

Abstract:

Every individual is different from others due to various factors which include demographic factors, age, race and sex, education level, social and economic background; same is the situation with the investors. The most critical challenge faced by them is the investment decision; they act in a rational manner and usually follow their instincts and emotional biases while making investment decisions. The investigation of previous studies reveals the importance of various psychological factors which affect their investment decision. Keeping this in view, a study model has been developed to describe the impact of risk propensity, asymmetric information and problem framing on investor’s behavior while making decisions through the mediating role of risk perception; also it determines how much weight is attached to each independent variable by the investors when they make their decisions. Overall discussion concludes that the investor’s behavior depends on how the available information is being presented to them and how much they are prone to taking risk while making decisions; thus playing a significant role in determining the investment style of an investor.

Key words: Risk perception Propensity Information asymmetry Investment decisions

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INTRODUCTION

In present day behavioral finance is becoming an integral part of decision making because it greatly influences investor’s behavior regarding decision making process. An investor is affected by various psychological and demographic factors while making investment so a proper understanding of them and by what magnitude it effects is important. Better understanding of behavioral finance will help the investors to select a better investment option.

The purpose of the analysis is to determine the investment behavior of investors and investment preferences for the same. Investors perception will provide a way to accurately measure how the investors think about the products and services provided by the company. Today’s trying economic conditions have forced difficult decisions for companies. Most are making conservative decisions that reflect a survival mode in the business operations. During these difficult times, understanding what investors on an ongoing basis is critical for survival. Executives need a third party understanding on where investor’s loyalties stand. More than ever management needs ongoing feedback from the investors, partners and employees in order to continue to innovate and grow.

Objective of the Study

“The main objective of the project is to find out the needs of the current and future investors.”

For this analysis, customer perception and awareness level will be measured in important areas such as:

To understand in depth about different investment avenues available in India.

To find out how investors get information about the various financial instruments.

The type of financial instruments, they would prefer to invest.

The duration for which they would prefer to keep their money invested.

What are the factors that they consider before investing?

To give a recommendations to the investors that where they should invest.

To know the risk tolerance level of the individual investor and suggest a suitable portfolio.

To develop a profile of sample Indian individual investor in terms of their demographics. And demographics based on occupation of the sample investor.

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To identify the objective of savings of an investor.

To study the difference in pattern of investment between government and private employees.

.Literature Review:

Literature suggests that major research in the area of investors’ behaviour has been done by behavioural scientists such as Weber, Shiller and Shefrin. Shiller who strongly advocated that stock market is governed by the market information which directly affects the behaviour of the investors. Several studies have brought out the relationship between the demographics such as Gender, Age and risk tolerance level of individuals. Of this the relationship between Age and risk tolerance level has attracted much attention.

Horvath and Zuckerman suggested that one’s biological, demographic and socioeconomic characteristics; together with his/her psychological makeup affects one’s risk tolerance level. Malkiel suggested that an individual’s risk tolerance is related to his/her household situation, lifecycle stage and subjective factors. Mittra discussed factors that were related to individuals risk tolerance, which included years until retirement, knowledge sophistication, income and net worth. Guiso, Jappelli and Terlizzese, Bajtelsmit and VenDerhei, Powell and Ansic, Jianakoplos and Bernasek, Hariharan, Chapman and Domain, Hartog, Ferrer−I− Carbonell and Jonker concluded that males are more risk tolerant than females.

Wallach and Kogan were perhaps the first to study the relationship between risk tolerance and age. Cohn, Lewellen et.al found risky asset fraction of the portfolio to be positively correlated with income and age and negatively correlated with marital status. Morin and Suarez found evidence of increasing risk aversion with age although the households appear to become less risk averse as their wealth increases. YOO found that the change in the risky asset holdings were not uniform. He found individuals to increase their investments in risky assets throughout their working life time, and decrease their risk exposure once they retire.

Lewellen et.al while identifying the systematic patterns of investment behaviour exhibited by individuals found age and expressed risk taking propensities to be inversely related with major shifts taking place at age 55 and beyond. Indian studies on individual investors' were mostly confined to studies on share ownership, except a few. The RBI's survey of ownership of shares and L.C. Gupta's enquiry into the ownership pattern of Industrial shares in India were a few in this direction. The NCAER's studies brought out the frequent form of savings of individuals and the components of financial investments of rural households. The Indian Shareowners Survey brought out a volley of information on shareowners. Rajarajan V classified investors on the basis of their demographics. He has also brought out the investors' characteristics on the basis of their investment size. He found that the percentage of risky assets to total financial investments had declined as the investor moves up through various stages in life cycle. Also investors' lifestyles based characteristics has been identified.

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The above discussion presents a detailed picture about the various facets of risk studies that have taken place in the past. In the present study, the findings of many of these studies are verified and updated.

Research Methodology:

Sampling technique

Convenience sampling technique is used for collecting the data from different investors.

The investors are selected by the convenience sampling method. The selection of units from the

population based on their easy availability and accessibility to the researcher is known as

convenience sampling. Convenience sampling is at its best in surveys dealing with an

exploratory purpose for generating ideas and hypothesis.

Sampling unit:

The respondents are asked to fill out the questionnaires are the sampling units. These

comprise of employees of government employees, private employees, self employed,

professionals and other investors.

Sampling size:

The sample size is 60, which comprised of mainly people from different regions of Allahabad

and Lucknow due to time constraints.

Sampling area:

The area of the research is Allahabad and Lucknow.

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Primary Data:

Information is collected by conducting a survey by distributing a questionnaire to investors in Lucknow and Allahabad. These 60 investors are of different age group, different occupation, different income levels, and different qualifications. (A copy of the questionnaire is given in the last as ANNEXURE 1).

Secondary data:

This is done through various research paper and journals.

Dependent and Independent variable and Research Hypothesis:

There are total four independent variables

Age group. 2. Occupation. 3. Qualification. 4. Annual income

Dependent variables like:

Level of risk tolerance

Percentage of income that can be invested

Time period that can be taken for investments

Investment preferences.

Hypothesis:

Increase in Age decreases the Risk tolerance level. Income and investments are positively related. Investment preferences are affected by the occupation level.

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DATA ANALYSIS and INTERPRETATION:

This analysis is done on the basis of questionnaire which being filled by 60 respondents.

The questionnaire contains various questions on the investor’s financial experience, based on

these experiences an analysis is made to find out of investment pattern .

Table 1:

PARAMETER NO: OF INVESTORS PERCENTAGE

GENDERMALE 42 70%FEMALE 18 30%

TOTAL 60 100%

AGE GROUPBELOW 20 0 0%BETWEEN 20 − 30 28 46.67%BETWEEN 30 − 40 22 36.67%ABOVE 40 10 16.66%

TOTAL 60 100%

QUALIFICATIONUNDER GRADUATES 0 0%GRADUATES 31 51.67%POST GRADUATES 20 33.33%OTHERS 9 15%

TOTAL 60 100%

OCCUPATIONSALARIED 40 66.67%BUSINESS 10 16.67%PROFESSIONAL 10 16.66%HOUSE WIFE 0 0%RETIRED 0 0%

TOTAL 60 100%

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ANNUAL INCOMEBELOW Rs. 2,00,000 0 0%Rs. 2,00,000 − 4,00,000 21 35%Rs. 4,00,000 − 6,00,000 30 50%ABOVE Rs, 6,00,000 9 15%

TOTAL 60 100%

Table 1 shows that out of 60 respondents, 70 % are male because male are more dominant in Indian family and take major investment decisions.Major people whom I have surveyed are salaried class than business and lastly professionals.

When it comes to age major investors are of young age as compared to old. Major investors are educated and thus more knowledgeable toward investment options.

Investors are of higher income group which give them the option of diversified investment and thus analysis will be more wide and reliable.

Table 2.1 INVESTORS WILLING TO LOSE PRINCIPAL AMOUNTPARAMETER NO OF INVESTORS PERCENTAGEYES NO

357

595

TOTAL 60 100

Above table shows that 95% respondents are not willing to lose their principle amount thus people are less prone to risk.

Table 2.2 TIME PERIOD PREFERED TO INVESTPARAMETER NO OF INVESTORS PERCENTAGESHORT TERM MEDIM LONG TERM

53520

8.3458.3333.33

TOTAL 60 100

Major investors are mediocre investors and thus invest for a medium term investment to play 7

safe.

Table 2.3 FREQUENCY OF MONITORING THE INVESTMENTPARAMETER NO OF INVESTORS PERCENTAGEDAILY 9 15MONTHLY 20 33.33OCCATIONALLY 26 43.37OTHER 5 8.3TOTAL 60 100

When we see frequency of monitoring, major respondents occasionally monitor their investments.

Table 2.4 INVESTMENT IN EQUITY MARKETPARAMETER NO OF INVESTORS PERCENTAGEYES NO

1842

3070

TOTAL 60 100

Generally people invest less in equity market as it requires more monitoring and it’s also volatile.

Table 2.5 FAMILY BUDGETPARAMETER NO OF INVESTORS PERCENTAGEYES NO

2436

4060

TOTAL 60 100

As per above it can be interpreted generally people don’t have a formal budget.

Table 2.6 INVESTMENT TARGETPARAMETER NO OF INVESTORS PERCENTAGE

8

YES NO

2832

46.6753.33

TOTAL 60 100

As per analysis generally people have less investment target as they don’t have a formal budget.

Table 2.7 FINANCIAL ADVISORPARAMETER NO OF INVESTORS PERCENTAGEYES NO

852

13.3386.67

TOTAL 60 100

People generally don’t make investment using financial advisor as they do investment through the advice of sociable factors.

Table 3.1 SAVINGS OBJECTIVEPARAMETER WEIGHTS RANKINGCHILDREN'S EDUCATION 26 1RETIREMENT 14 2HOME PURCHASE 10 3CHILDREN'S MARRIAGE 8 4

OTHERS 2 5TOTAL 60

It had been found major people do investment for the welfare of their family and than for retirement benefits.So it can be concluded that Indian mindsets is more prone to family welfare.

Table 3.2 PURPOSE BEHIND INVESTMENTPARAMETER WEIGHTS RANKWEALTH CREATION 12 4TAX SAVING 14 3EARN RETURNS 19 1FUTURE EXPENDITURE 15 2TOTAL 60

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Above parameter show that major reason why people save is to get high return and also for tax saving.

Table 3.3 FACTORS CONSIDERING BEFORE INVESTINGPARAMETER WEIGHTS RANKINGSAFETY OF PRINCIPAL 17 1LOW RISK 16 2HIGH RETURNS 14 3MATURITY PERIOD 13 4TOTAL 60

And when we talk about factor considering investment than the major important factor is safety and risk as I have surveyed generally middle class population.

TABLE 4: DEMOGRAPHICS BASED ON OCCUPATION

I. SALARIED

PARAMETER NO: OF - SALARIED PERCENTAGEAGE GROUPBELOW 20 0 0%BETWEEN 20 − 30 18 45%BETWEEN 30 − 40 12 30%ABOVE 40 10 25%

TOTAL 40 100%

QUALIFICATIONUNDER GRADUATES 0 0%GRADUATES 19 47.5%POST GRADUATES 15 37.5%OTHERS 6 15%

TOTAL 40 100%10

ANNUAL INCOMEBELOW Rs. 2,00,000 0 0%Rs. 2,00,000 − 4,00,000 16 40%Rs. 4,00,000 − 6,00,000 20 50%ABOVE Rs, 6,00,000 4 10%

TOTAL 40 100%

II. Business:

PARAMETER NO: OF - BUSINESS PERCENTAGEAGE GROUPBELOW 20 0 0%BETWEEN 20 − 30 2 20%BETWEEN 30 − 40 8 80%ABOVE 40 0 0%

TOTAL 10 100%

QUALIFICATION0 0%UNDER GRADUATES

GRADUATES 6 60%POST GRADUATES 2 20%OTHERS 2 20%

TOTAL 10 100%

ANNUAL INCOMEBELOW Rs. 2,00,000 0Rs. 2,00,000 −4,00,000 2 20%Rs. 4,00,000 −6,00,000 4 40%ABOVE Rs, 6,00,000 4 40%

TOTAL 10 100%

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III. PROFESSIONAL

PARAMETER NO: OF - PROFESSIONAL PERCENTAGEAGE GROUPBELOW 20 0 0%BETWEEN 20 − 30 8 80%BETWEEN 30 − 40 2 20%ABOVE 40 0 0%

TOTAL 10 100%

QUALIFICATIONUNDER GRADUATES 0 0%GRADUATES 6 60%POST GRADUATES 3 30%OTHERS 1 10%

TOTAL 10 100%

ANNUAL INCOMEBELOW Rs. 2,00,000 0%Rs. 2,00,000 −4,00,000 3 30%Rs. 4,00,000 −6,00,000 6 60%ABOVE Rs, 6,00,000 1 10%

TOTAL 10 100%

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Here the assumption is that occupation derives investment avenues.

Table 5: INVESTMENT PREFERENCE BASED ON OCCUPATION

Table 5.2 Preferred investment avenues for salaried people

INVESTMENT AVENUES RANKLIFE INSURANCE 1BANK FIXED DEPOSITS GOLD

2GOLD 3MUTUAL FUNDS 4REAL ESTATE 5POST OFFICE SAVINGS 6PPF 7NSC 8EQUITY SHARES 9SAVINGS ACCOUNT 10

Table 5.2 Preferred investment avenues for business people

INVESTMENT AVENUES RANKBANK FIXED DEPOSITS 1INSURANCE 2REAL ESTATE 3MUTUAL FUNDS 4GOLD 5EQUITY SHARES 6

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CHIT FUNDS 7POST OFFICE SAVINGS 8SAVINGS ACCOUNT 9

NSC 10

TOTAL

Table 5.3 Preferred investment avenues for professionals

INVESTMENT AVENUES RANKBANK FIXED DEPOSITS 1INSURANCE 2GOLD 3REAL ESTATE 4POST OFFICE SAVINGS 5SAVINGS ACCOUNT 6MUTUAL FUNDS 7PPF 8BONDS 9GOVT SECURITIES 10

TOTAL

From the analysis it can be found that occupation derive your investment options and ranking for we can clearly see that salaried business and professional have all together different ranking for investments because they have different risk ranking and different income sources.

So here we can say that occupation and investment are positively related and they have a profound effect on the investment pattern.

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Table 6: Finding relationship between age group and level of risk tolerance

Table 6.1 risk tolerance of age group 20 − 30

PARAMETER 20 − 30 AGE GROUPNO OF

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LEVEL OF RISK INVESTORS PERCENTAGE

LOW RISK 10 36%MEDIUM RISK 12 43%HIGH RISK 6 21%

TOTAL 28 100%

Table 6.2 risk tolerance of age group 30 − 40

PARAMETER 30 − 40 AGE GROUPNO OF

LEVEL OF RISK INVESTORS PERCENTAGE

LOW RISK 12 55%MEDIUM RISK 7 32%HIGH RISK 3 13%

TOTAL 22 100%

Table 6.3 risk tolerance of age group above 40

PARAMETER ABOVE 40 AGE GROUP

LEVEL OF RISK NO OF INVESTORS PERCENTAGE

LOW RISK 7 70%

MEDIUM RISK 2 20%

HIGH RISK 1 10%

TOTAL 10 100%

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From the analysis it can be seen that the age bracket 20-30 medium risk was high but as we see when the age of respondent is increasing it is showing a fall in the medium risk in percentage term but a high trend in the low risk category.

And there is a high percentage in lower age group and vice versa. Like its 10 percent at the age group above 60 and 21 percentage at the age group 20 to 30 age bracket.

From the above it can be concluded that age and risk have a negative relationship.

Karl Pearson’s correlation coefficient is calculated, it is found to be −0.71 by which we can conclude that there is a strong negative correlation between Age and Risk tolerance.

Income and investment relationship:

From the table it’s been found that higher income people have a high budget of investment as well as they are more risk prone as compared to the lower income group people or people have less source so they invest less and what all they invest they invest in moderate securities.

Benefit of study:

This study will be helpful in understanding investor’s behavior and will also help in devising portfolio according to the need of investors keeping in mind the occupation and income factors into consideration.

Findings and conclusion:

Through this analysis it can be concluded that investment and income are positively related there is also a inverse relationship between risk and age which can be verified by correlation factor. Occupation and investment patterns are also closely relatedThis study also helps in understanding the investment patterns, type of investment avenues, and difference between investment pattern of government, business class and professional people.

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Bibliography:

1. Chin, A.L.L., 2012. Psychological Biases and Investor Behavior: Survey Evidence from Malaysian Stock Market. International Journal on Social Science Economics and Art, 2.2. Chira, I. and B. Thornton, 2008. Behavioral Bias within the Decision Making Process, Journal of Business and Economics Research, 6: 8-11.3. Iman, Z., 2011. Study of Effectiveness models in optimal portfolio of shares. Middle East Journal Scientific Research, 10(2): 239-246.4. Hunjra, A.I., M. Azam, G.S. Niazi, B.Z. Butt, K. Rehman and R. Azam, 2011. Risk and Return Relationship in Stock Market and Commodity Prices: A Comprehensive Study of Pakistani Markets. World Applied Sciences Journal,5. Lubna Riaz, Ahmed Imran Hunjra and Rauf-i-Azam Impact of Psychological Factors on Investment Decision Making Mediating by Risk Perception: A Conceptual Study, Middle-East Journal of Scientific Research 12 (6): 789-795, 20126. A study of investor analysis, Nizam college Hyderabad.

Book

1. Understanding Indian Investors, by Jawahar Lal.

2. Security Analysis and Portfolio Management by Punithavathi Pandian.

3. Investment Analysis and Portfolio Management, by Prasanna Chandra.

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