RISK PERCEPTION AND PORTFOLIO MANAGEMENT OF EQUITY INVESTORS

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RISK PERCEPTION AND PORTFOLIO MANAGEMENT OF EQUITY INVESTORS

CHAPTER ONE

1.0 INTRODUCTION

Investment is a price that an investor sacrifices today in order to gain future reward. In general, an investor always tries to maximize the return and minimize the risk involved. There are many factors that affect an investment decision such as the demographic, knowledge level, awareness, experience etc. It is found that Demographic factors such as gender, income level, age, education, family size have a significant impact on investment decision making process, especially in Indian context.

The concept ‘risk perception’ means the way in which investors view the risk of financial assets, based on their concerns and experience. Risk perception is the belief, whether rational or irrational, held by an individual, group, or society about the chance of occurrence of a risk or about the extent, magnitude, and timing of its effects.is a critical success factor that promotes effective decision-making in risky situations.

Everyone today makes investments and investors today have so many options to choose from. Hence, it becomes imperative to understand the investment process and decision making steps. Each investor has an objective in mind before making any decision with regards to investing. When these objectives are not clearly articulated investors land up with a decision which gives a suboptimal return. It is always wise to set a clear objective in mind before making any decision and accomplish the goal.

An investor may have a short term or a long term horizon; the short-term effectiveness examined through the event analysis of the abnormal return for the recommended stock around the financial announcement or due to market fluctuations whereas long-term investment horizon examined through the investment value from a passive portfolio management strategy.

The different avenues of investment areas are as follows:

i. Low-risk avenues: savings accounts, bank fixed deposits, CPF, government securities and so on.

ii. Moderate-risk avenues: mutual funds, unit trusts, ETF, life insurance, debentures, bonds.

iii. High-risk avenues: equity share market, commodity market, FOREX market.

iv. Traditional avenues: real estate (property), gold/silver.

v. Emerging avenues: virtual real estate, hedge funds/private equity investments, art and passion.

Investors choose an appropriate avenue depending on their specific need, risk preference and expected returns.

Background of the study

The growing area of finance is known as behavioral finance which focuses on individual attributes that shape the common investment practices. Study of risk perception and its impact on investment behavior is one of the core investigation issues of behavioral finance research.

While talking about the risk factor in any investment, it is important to understand that the decision making behavior of an individual is often affected by their attitude towards the risk. The investors’ decision of investment is different as different levels of perception towards the risk. Investors usually take risks according to their perception and understanding of the risk.

The present financial system offers so many investment avenues for the investors to choose from. Some offer very attractive returns but come with a high risk and some come with low returns and low risk. An investment can be called a perfect investment only if satisfies all criteria and needs of an investor, which is often never the case. Therefore, the starting point of searching of any perfect investment must look at through the investor needs. If all those needs are meets by the investment, then that investment termed the perfect investment.

PritiMane [1] discussed the customer perception with regard to the mutual funds that the schemes they preferred, the plans they are opting, the reasons behind such selections. This research dealt with different investment options, which people prefer along with and apart from mutual funds, like postal saving schemes, recurring deposits, bonds, and shares. Conclude that mutual fund linked with share market and investors are not taking advice from authority advisor to lead them for their investment in mutual fund so it creates the difficulty to select the mutual fund plan favorable for them.

Awais et al. [2] explored that the factors which influence the decision-making process of investors. According to their research, the decisions of the investors depend upon the degree of the risk factors. Finally, they found that the increased level of knowledge about financial information and the increased ability of analyzing that information, investor could improve the capacity jump into risky investments for earning high returns by managing investment efficiently.

Shukla [3] attempted this research paper, about investor’s preference towards investment avenues and the study focused on the salaried person only. The author concluded that majority of the respondents invested their money based on education background and they invested in purchasing home and long-term investment. Respondents have the criteria of investment as safety and low risk.

Amudhan et al. [4] analyzed the performance investment behaviour concerned with choices about purchases of small amounts of securities, deposits, mutual fund, insurance, Chit Funds. Researcher confirmed that there looks to a positive degree of correlation between the factors that behavioral finance theory and previous empirical evidence identified the average investor. The result described investment offer to a person’s money to gain future income in the form of interest, dividends, rent, premium, pension profit or approval of the value of their standard capital.

Vaidehi et al. [5] argued that because of different investment strategies as motives and styles by different needs. It studies the need for better accepting of behavioral pattern the paper investors, the behaviour pattern would aid the investment advisors to envision how the investors respond to market schedule, and would allow them to developed suitable allotment approaches for their customers. Among the selected factors the investment motives, attained the long-term gain, which established to an essential factor chased by dividend and growth prospects and balancing of short-term and long-term gain. Educational qualification, occupation, age, income and amount of equity investments choose the investing styles of the investors notably.

Mishra [6] explained that this study aimed to investigate perception of investor towards mutual funds with travel the important aspects of mutual funds affecting perception of investors and it examined difference of perception of large and small investors based on explored factors. Difference of view about mutual fund analyzed with the help of ‘t’ test. Small investors focused on tax returns and savings but large investors expect future return. Thus mutual fund companies must give due significance to these size for their survival and growth in Indian context.

Rastogi [7] analyzed behavioral feature in the investment choice making method.

Behavioral finance provides solution to many problems until now not answered suitably by the usual finance theory. The study concluded that behavioral biases not affected by the combined categories of gender and occupation.

kumar [8] carried out a research to find what plays a vital role in the minds of the investors before decided on investment. The nine factors namely security, risk tolerance, lucrative return, investment duration, periodic return, share preference, long term investment, futuristic return and investment dynamics influenced the investor’s perception the author conclude that investors compared their returns and calculate the inverse proportionality between time and the return. Among these factors, the futuristic goals of equity investors are very considered as a factor important for estimating their level of satisfaction.

Orerler and Taşpınar (2006) stated that in general there is lower risk tolerance for the unknown since the impacts are new, unobservable or delayed. Higher risk tolerance emerges when people feel more in control. Risk tolerance can be determined through consultation with affected parties or by assessing investors’ response or reaction to varying levels of risk exposure. Risk tolerance may change over time as new information and outcomes become available or as societal expectations evolve (Evans, 2004). Investors should explore the connections, or lack thereof, between their risk tolerance profiles and their expectations of investment returns. Finally, those attributes should be made explicit and used as key inputs in structuring their portfolios.

Statement of the problem

Making an investment requires careful decision making as it relates to allocation of money in different portfolios in order to maximize the return. The influence of risk perception on the investment criteria of an investor has become a subject in the behavioral finance literature. The risk perception of an investor is often found to influence the investment decision. The investment decision means a decision where the investor makes up his or her mind as to where, when, how and how much funds will be invested on various financial products and instruments available with an objective of getting an income at a future date. The investment decisions could be influenced by unavoidable psychological and emotional factors. Better understanding of these factors will help the investors to take a suitable investment decision and also help them not to repeat their mistakes in future in extracting the best financial investment avenues.

1.3 Objectives of the study

1. To study risk perception of investors.

2. To understand the portfolio selection of the investors.

3. To understand the motivation factors behind investment.

4. Identify factors that affect people’s investment decisions and hence their portfolio