Chapter 2: Literature Review
2.1 Introduction
Based on the FIMM (Federation of Investment Manager Malaysia) organization description, there are seven benefit of investing in unit trust which is unit trust are affordability for investors', diversification of fund, liquidity, professional fund management to help build wealth of investors, investment exposure, wholesale investment costs and access to other asset classes, and the comfort of regulation. All of these benefit assist to build wealth of investors.
Alexander et al. (1988) found in their survey that the median age of a mutual fund shareholder is 43 years and that younger investors are more likely to invest in mutual funds through their pension plans than older investors. Previous study shows that different stage or age of investors have different invest behavior.
Unit trust fund also known as mutual fund. The percentage of novice investors who own unit trust has grown more than eightfold over the past 25 years. Therefore, mutual funds are important financial services in developing countries such as India, Indonesia, and Malaysia (Ramasamy and Yeung 2003). Besides that, the growth in mutual funds can be tied to the increase in personal income (Anne Macy 2005), which can build wealth of investors.
According to John Kozup et al. (2008), making wise financial investment is one of the most important and challenging decision faced by investors. Unit trust is always the best choice for investor because purchase shares in one or more of the thousands of available unit trust is one of the ways to maintain and build wealth of investors. There has many channels to purchase unit trust fund, the choice of channel to use is based on investors desire to invest.
2.2 Knowledge level
According to Brucks (1985), it does not whether matter the level of investor knowledge toward the product is high or low, it all affect the investors information search and information processing procedure. In the Brucks (1985) and Rao and Sieben (1992) research, it mention that during purchase processing, a consumer's knowledge of the product or fund would not only affect their search behavior, but also affect their information treatment and decision-making processing and would furthermore, affect their purchase intension. This showed that purchase decision were influence by knowledge of the fund, which is related with the understanding of the fund.
Based on the previous research, it has shown that investors' are allow to use product-related information more appropriately in judgment and make a correct purchase decision when they have greater product knowledge. (Alba and Hutchinson 1987: Levy, Fein, and Stephenson 1993) In addition, more knowledgeable investors' seem to have good and nicer attitudes toward the product and information of the product. (Suter and Burton 1996) Based on the prior research, it shown that financial knowledge is very important and it can tend to bring a lot of benefit for investors'. Brennan (1995) argued that examining the investment decision process from the individual investor's perspective and knowledge is a much needed area of research.
In this knowledge based century, financial knowledge is quite important for those investors' but according to a Financial Literary Index Analysis 1994 by Merrill Lynch and Company, more than 80 percent of the respondents failed a test of basic finance knowledge. Besides that, based on Capon (1994) survey, the average American investors is unable to respond the simplest question regarding to their investments.
Many businesses are found that employees don't know the basic of financial knowledge either (McCarthy and McWhirter, 2000; Quinn, 2000). A 2004 survey conducted by JumpStart found that on average only 52.3 percent of high school seniors answering the financial question correctly. Zhu (2004) states that when the consumers select a product, they usually rely on product knowledge to evaluate it and same in the unit trust industry, investors also will rely on the finance or fund knowledge before make a investing choice. Fund knowledge would also affect consumer information search procedure, attitude, and information search quantity. In addition, investors' level in fund knowledge would determine investors purchase decision. This shown that different level of knowledge would determine an investors' purchase decision and would indirectly affect their purchase intention.
According to Anne Macy (2005) research, the research shows that students learned financial literacy from their parents in the past but the education is still extremely lacking. Majority of the investors' are still lack of finance knowledge. (Martenson 2005)
According to Maureen Morrin, et.al (2008) research, finance knowledge is important for those investors who wish to choose a suitable fund for their purpose to earn or to hold. There has a lot of benefit for knowledgeable investors because individuals with more investing knowledge should be able to more easily and rapidly differentiate and comparing among the classes of mutual funds. The researchers also analysis on less knowledge investors', the result stated that less finance knowledge investors' are more difficulty and slowly to differentiating and categorizing funds by asset class. Therefore, Maureen Morrin et.al (2008) concluded that investors with greater level of investing knowledge are more likely to fully understand the theory behind and the great benefit of portfolio diversification.
John Kozup et al. (2008) analysis on investors' responses which are expected influence by the prior knowledge of unit trust investment process. The researches stated that investor's knowledge level had positive relationship with investors' attitudes, investment intensions and expectations of future performance toward superior or inferior fund. It's mean when investors' have a greater knowledge level, they will tend to have more favorable attitudes, more highly investment intensions and high expectations of future performance toward superior or inferior fund. Besides that, it shown that knowledge level significantly influenced perceived risk levels, which investor with a higher level of knowledge perceived the superior fund to be less risky than less knowledgeable investors.
In the John A. Haslem (2009) research, it analyzed and focuses on the relationship of investors and knowledge. The authors stated that more highly educated investors with more knowledge of concernment finance concepts can make a better purchase decision and fund selection. They normally less focused on fund fees but more focused on past performance and rely on short-term performance. Besides that, John A. Haslem also said that, "highly educated and wealthy mutual fund investors are worse than average at fund selection, and more savvy investors tend to make poorer mutual fund choices than less savvy investors".
2.3 Source of information
These sources provide performance statistics and fund attributes, such as information on fund managers, expenses ratios, and turnover, but an individual investor seldom has time or the expertise to analyze the huge amount of data available on mutual funds. Therefore, investors' will choose their own source to get more information. There has many unit trust source of information in Malaysia, but only few popular sources of information will test on this study. Investors' may get information from financial advisor or fund manager, rely on performance ranking, advertising or recommendation from others.
Noel Capon et.al (1994) stated that there has several additional factors were also relevant which is recommendation from a financial magazine or newsletter, availability of telephone switching, funds already owned in that family and friends' recommendation.
According to Hakan Saraoglu and Miranda Lam Detzler in "A sensible mutual fund selection model" (Financial Analysts Journal; May/Jun 2002; 58, 3), the increasing and growth of mutual funds has made a challenge to many investors to choosing the right funds. In response, many magazines and news services designed to assist investors in mutual fund selection have facilitate.
2.3.1 Finance advisor/Fund manager
As for the performance, in the Grinblatt and Titman et.al (1993) research have shown that funds with the lowest returns tend to continue to underperform. Therefore, financial advisors or fund manager's are very important and they became a role for estimating unit trust fund future performance.
Financial advisor or fund managers often have high potential liability and risk because if investors dissatisfy, they are allows sue for damages if they believe they received unsuitable investment advice and cause loss and failed in investing (Bolster et.al 1995). Therefore, there has a law to protect consumers' right and reputation of fund manager will be concern. American Express estimates, "that more than 30 percent of their investment advisers' clients would defect if a personal adviser left the company" (Tax and Brown, 1998).
Previous research makes and explained differences between observable similarities such as physical or behavioral of people and internal similarity such as a person's perceptions, beliefs and values (Dwyer et al., 1987; Lichtenthal and Tellefsen, 2001). Therefore, contact person and can also known as financial broker has an ability to understand and identify with the thoughts and feelings of the customer (Pilling and Eroglu, 1994). There must have communicate and trust among them to avoid dissatisfaction of investors.
Previous research shows that repurchase intention are strongly related to satisfaction across product categories (Bolton, 1998; Zeithaml et al., 1996). If the company or financial advisor treat investor's very well, investors' willingness to recommend a company or fund to friends or family, which in turn is determined by all functional areas that contribute to their experience (Reichheld, 2003). Vice-versa, when customers perceive they are treated badly, they may blame and it will affect their purchase decision. As the evidence of this, one of the previous studies stated that, 2000 bank customers change bank was a better deal from another bank, while 15 percent changed because they felt they were badly treated in their old bank. (Konkurrensverkets rapportserie, 2001, p. 5) Therefore, financial advisor carry an important role to maintain relationship with investors' and responsible to give an expertise advise for them.
According to Chevalier and Ellison (1999) research, it analyze the fund managers' risk taking behavior changes their careers and they stated young managers are more likely to choose conventional portfolios and old managers generally take more risk. So based on this study, the selection of fund manager is quite important because different generation of fund manager will give different advice.
Satisfaction and trust are closely related in relationship building. Some researchers argue that satisfaction leads to trust (e.g., Hart and Johnson, 1999), while others say that trust leads to satisfaction (Swan et al., 1999). "The link between service quality and purchase intentions is the link most often researched and confirmed in all studies of service quality and profitability," by Zeithaml (2000).
Decision makers may form a reputation for the financial advisor which guided them to use of advice (Yaniv and Kleinberger, 2000). Reputation formation may be described as the process of forming an impression about an advisor's quality from previous experience. Therefore, "there are reasons to expect that good and poor advice might have a differential impact on the evolution of reputation," by Yaniv and Kleinberger (2000).
According to Joiner et al. (2002), researchers found that strong direct relationship between the financial planners' trustworthiness and the clients' intentions to seek the financial planner's advice. It can be proven by another researcher, Sniezek and Van Swol (2001) found that individuals' trust in their advisors was significantly related to their taking the advice and being confident in their final purchase decision.
Previous studies have shown that expertise influences trust (.Moorman et al., 1992). Joiner et al. (2002) found that there has indirect relationship between expertise and intention to seek the fund manager advice through the investor's perceptions of the financial planner's trustworthiness. Therefore, financial advisor must be able to translate their knowledge into something useful to investors' (Sirdeshmukh et al., 2002).
From a fund manager's perspective and view, it is crucial to understand why some investors stay with a particular fund and why some switch to other funds within their fund family because this knowledge enables fund managers to accomplish two strategic goals in attracting and retaining new customers. (Mary Jane Lenard et.al 2003) Retaining customers in a fund family is a less costly and more efficient marketing strategy than finding new customers (Levin 1993). Therefore, it is important for fund managers to develop customer profile that will help them answer questions about loyalty and fund switching behavior of investors.
Based on prior research, most of the investors are willing to invest through financial broker or fund managers because it can help reduce investors' information search costs. (Raquel Meyer Alexander and LeAnn Luna 2005) Fund managers will help investors estimating future performance and give some recommendation and information for investors and will get some commission or fee based as a return. Investors rely on finance advisor for some expert advice when they want to make some risky financial decisions (White, 2005).
Prior studies have shown that when people face at higher task complexity levels, they will feel that they are better off relying on the expertise of their financial advisors. (Schrah et al., 2006) "When the emotional difficulty of the decision was low, the advisor's expertise had as strong an effect on advice acceptance when benevolence information was presented as it had in the absence of such information."(White, 2005)
Characteristics of the contact person have been shown to be important determinants of the perceived quality of the relationship (Dunn and Schweitzer, 2005; Isen, 2001; Palmatier 2006) It's mean financial broker are important for investors' and relationship between investors and fund manager must be favorable and they should be have fully trust among them to achieve both investing objective.
"A reason may be that their involvement in financial products is low, and of a rational nature, which made Foxall and Pallister (1998) ask: "why doesn't the buyer of financial services become emotionally involved with the brand?" researchers hypothesized that the cause had more to do with the consumers' uncertainty, doubt and confusion with the financial product market," said by Rita Martenson (2007).
According to Rita Martenson (2007), when the outcome of the decision is subjectively important, it's mean a risky financial decision will be occurred, but the possibility of its occurrence is unclear. Process to make an evaluation of professional advice became difficult due to the lack of simple evaluation criteria. Besides that, in this research, the authors also stated that financial advisors are responsible to delivering service quality because they may have a large impact on investor's loyalty. From previous study, the wide number of mutual funds and stocks on the market makes the perceived expertise of the contact person is likely to influence investor's satisfaction as well as trust (Rita Martenson 2007).
Online investors can execute a trade for up to 90 percent less than a traditional broker's fee; it is crucial and extremely important that banks and brokers provide a high relationship quality that justifies the price difference. Rita Martenson (2007) hypothesize that trust has crucial importance for customers' evaluations of relationship quality. "Consumers may try to resolve social uncertainty and develop trust in the advisor by evaluating both the ability and intentions of the advisor by utilizing relevant cues," by Schrah (2006). It's mean that investors will look for indications that their financial advisors' goals are similar to their own goals.
"The Nordic Competition Offices found for example that 70 percent of the customers in Denmark would not consider switching banks even if it could be done without costs and that the situation was similar in the other Nordic countries." (Nordic Competition Authorities, 2006, p. 81) Rita Martenson (2007) hypothesizes that the customer contact person will influence their customers' decisions. Based on Rita Martenson research, there are several reasons why investors may solicit some expertise advice, such as:
. To gain information;
. To get help to frame their decisions;
. To refine their preferences;
. To create options beyond those available to them at the moment, and;
. Other reasons such as to share responsibility for the decision (Yaniv and Milyavskky, 2007).
2.3.2 Performance ranking
Excellent portfolio performance would tend to receive favorable publicity from financial magazines, publishers of mutual fund ratings and newspapers. According to Peggy Chong (1997), poor performance ranking leads to reduced sales. Therefore, ranking of the fund can be affect investors purchase decision. Normally investors will choose the fund they trust and confidence with.
Performance ranking is one of the sources of information and investors' can evaluate and choose the fund based on the performance ranking due to the trustworthy in mind. Del Guercio and Tkac (2005) found that fund ratings upgrades to five stars lead to abnormally high flows. Similarly, Yankow et al. (2006) found that funds with higher ratings have significantly higher flows. Finally, Knuutila et al. (2007) found that Finnish funds with five stars have significantly higher flows than lower-rated funds, although the result is conditional on the funds being distributed by non-bank institutions. Based on the evidence above, we can prove that performance ranking have a positive relationship with the unit trust fund flows.
2.3.3 Advertising
Mutual fund advertising has form as one of the most important sources of information for individual investors when making investment purchase decision (Capon et. al 1996). Some researcher stated that mutual funds advertising are focusing on characteristics which include brand name, retirement planning, software, peace of mind, and reputation other than specific mutual fund and fund performance (Brandstrader 1996; Geer 1997; Wechsler 1998; Voight 1998). But performances of mutual funds are significantly related to investors' purchase decision because most of the investors will look for past performance to increase their confidence on the fund.
Based on previous study, investors' want to reduce their information search costs, they will base on the advertising to get more information and make a purchase decision. Therefore, a lot of fund companies have increasingly used advertising as communication vehicle to attract more mutual fund investors (Geer 1997; Walbert 1997).
Marketing efforts will significantly increase flows into mutual funds. (Sirri and Tufano 1998) Another researchers Jain and Wu (2000) also proven that advertising does lead higher fund flows and fund that advertise have strong past performance.
Jain and Wu (2000) found that mutual fund inflows are positively related to the amount of the fund's advertising and other media exposure. There has variety type of unit trust fund advertising can use to be attract investors' which include local newspaper, magazines, national papers, direct mail, seminars or exhibition, or by media which is radio and television to promote the variety type of unit trust fund. Due to increased competition in mutual fund industry, advertising of mutual fund has significantly increasing. (Jordan and Kaas 2002) Mutual fund companies have increasingly used television advertising and direct mail to reach investors (Michael A.Jones and Tom Smythe 2003).
Mutual funds advertising and investment decisions have strong cause-and-effect relationship. (Jain and Wu 2002) According to John Kozup et al. (2008), making wise financial investment is one of the most important and challenging decision faced by investors. Unit trust is always the best choice for investor because purchase shares in one or more of the thousands of available unit trust is one of the ways to maintain and build wealth of investors. There has many channels to purchase unit trust fund, the choice of channel to use is based on investors desire to invest.
"The role of advertising in investor choice of mutual funds for those investors who rely on advertising, this is an important issue with investors increasingly making their own investment choices and the large increases in number of investment alternatives." Cronqvist (2006) "Funds advertising performance in the direct-market channel attract increased cash flow, while investors in the broker-sold channel increase investment in funds whether they advertise performance or not." (Yankow et al. 2006).
Based on previous study, mutual funds have a very successful history of using advertising to stimulate and attract investors' purchase decision. Advertising can be very useful and became a type of persuasion, which includes only objectively useful fund information. (John A. Haslem 2009) Therefore, advertising influences investor mutual fund purchase decision.
Unit trust fund advertising should include information on fees, product choices, and risk data (John A. Haslem 2009) because the information contained in unit trust fund advertising is important for public policy and consumer welfare. Based on previous study, information contained in unit trust fund advertising is very important because the researchers have found that investors' relative lack of knowledge concerning unit trust fund. John A. Haslem (2009) said, "Uninformative mutual fund advertising may signal unobservable fund qualities, and yet repeated signals may enhance investor perceptions of particular funds."
2.3.4 Recommendation from others
Another source of information is investors' get recommendation from others, which can be recommendation of friends, family or business associates.
Research shows that stated repurchase intentions are strongly related to stated customers satisfaction across product categories (Bolton, 1998; Zeithaml et al., 1996). Investors willingness to recommend a company or fund to their friends when they fell they treated well by employees. (Reichheld, 2003) Vice-versa, when investors perceive they are treated badly, they may feel dissatisfied and it can be affects their purchase decision.
2.4 Investors' selection criteria
Based on 1990 Consumer Reports Survey of mutual fund investors, it found that although past performance and level of risk were rated the two most important factors in aggregate; but amount of sales charge, management fees, fund manager reputation and fund family also can be the factors which can influence mutual fund investors purchase decision.
According to a 1997 Investment Company Institute survey (Mutual Fund Fact Book 1997), it found that an average mutual fund investor considers 13 items of fund related information before investing. But studies have shown that individuals' investors' may make inconsistent preference assignments if they have to consider more than seven variables in a decision. (Miller 1956)
Sirri and Tufano (1998) had mentioned past fund performance, information search costs, company size, and the firm's level of marketing effort seem to have a strong influence on investor's mutual fund selection and decision process.
According to Hakan Saraoglu and Miranda Lam Detzler (2002), different investors face different restrict in their investment decision and a risky portfolio is widely and may be impossible to find. Therefore, the investment process is much more complicated, in addition to risk and return, factors such as taxes and human capital must be considered when making purchase decision. The researchers also stated that investors determining the proper risk level for them and created their own complete portfolios based on their own judgments. Unfortunately, most of the investors may not be competent at these tasks.
"The choice of unit trust fund can have a significant impact on terminal wealth and consumers' welfare." (Michael A.Jones and Tom Smythe 2003) Therefore, the investment decision is extremely important for all investors and they may get more information and they will select a fund based on few selection criteria such as management fees, reputation of fund manager, information of fund, investment performance and risk to increase their confidence to invest in those unit trust fund.
According to Mary Jane Lenard, Syed H Akhter, Pervaiz Alam (2003), they stated that the hybrid model will be useful to a mutual fund manager or investment advisor and to the individual investor as a tool of knowledge management to assist in evaluating the investment choices.
According to Raquel Meyer Alexander; LeAnn Luna; Peter J Frischmann (2005), investors always face a costly information search process about management fees, fund family, and specific investment choices when making purchase decision.
2.4.1 Fund management fees
Based on 1990 Consumer Reports Survey of mutual fund investor, it found that amount of sales charge and management fees is a factor that can be influence investors purchase decision. "Customers make long-term commitments in order to reduce transaction costs and the uncertainty of future benefits, and to obtain certain advantages not available in short-term exchange relationships." (Crosby et al., 1990)
Ippolito (1989) stated that some investors willing to take risk and select to higher fees fund because mutual funds with high turnover, fees and expenses are able to earn higher returns to offset the higher charges. Ippolito (1992) proven that transaction costs is a barrier for investors to reallocate their funds to top performers. From the prior study, fund underperformance can be caused by costs funds charge. (Roger Otten 2002)
According to Goolsbee (2002) and Turgesen (2004) research, management fees have negatively relationship with investment return, mean high management fees and loads significantly reduce investment returns. Therefore, major of investors' will likely to choose fund with the lowest management fees.
Based on the extensive lesson on mutual fund by Anne Macy (2005), an effective decision-making requires comparing costs along with comparing returns when choosing a mutual fund because some funds earn a higher return but they also charge additional loads and fees. The load has a greater effect the shorter the holding period.
2.4.2 Reputation of fund manager
Based on Elton and Gruber (1989) research studies, individuals investors not only focus on performance when make purchase decision, they also will focus on other variables such as fund manager reputation and responsiveness of fund to inquiries before making a purchase.
Financial advisor or fund managers often have high potential liability and risk because if investors dissatisfy, they can sue for damages if they believe they received unsuitable investment advice and cause loss and failed in investing (Bolster et. al 1995). Therefore, there has a law to protect consumers' right and reputation of fund manager will be concern.
Bruce A.Huhmann, Nalinaksha Bhattacharyya (2005) stated that stability information such as the mutual fund manager's reputation, fund's age, number of years the firm has been selling mutual funds, could reassure investors that their money is safe and more confidence with a particular mutual fund. Michael K.Brady and Brian L.Bourdeau (2005) also suggested that investment services firms must pay close attention to their reputation, included employees reputation because the research shown that investors may more focus on intrinsic problem which include namely reputation, ranking, and media reviews. All of this are most important to investors purchase and invest decision. Therefore, fund managers' reputation concerns distort their portfolio decision.
In the "studies on dynamic incentives of mutual fund managers" by Liquan Wang (2004), fund managers have incentive to imitate a benchmark portfolio because of reputation concerns. "Reputation concerns also cause fund managers with different beliefs about their abilities to adopt the same fee contract. The benchmark-mimicking outcome represents significant loss of efficiency. This distortion effect depends on the precision of signals, the probability of the manager being smart, and the asset fee. The use of long term performance measures mitigate the manager's incentive to choose inefficient portfolios" said by Liquan Wang.. Based on funds' historic performance, investors generally will switch fund and invest in those fund with good performance or just replace those managers with bad performance. (Liquan wang 2004) As a result, reputation effect influences managers' portfolio choice and portfolio restrictions and it could affect investors purchase decision.
Decision makers may form a reputation for the financial advisor which guided them to use of advice (Yaniv and Kleinberger, 2000). Reputation formation may be described as the process of forming an impression about an advisor's quality based on the previous experience. Therefore, "there are reasons to expect that good and poor advice might have a differential impact on the evolution of reputation," by Yaniv and Kleinberger (2000).
2.4.3 Information of fund
Information-seeking is widely considered to be an important step in the process of decision-making (Janis & Mann, 1977; Nisbett & Ross, 1980; Russo & Schoemaker,
2002). Henderson (1999) notes that more and more investors are relying on information that they gather themselves in order to manage their investments.
Information of fund typically can provide important investors benefit such as improved decision making, enhanced product quality, and lower prices. (Mazis et al.1981). That's mean provision of supplemental information can be influence on investor's mutual fund evaluations.
Chao and Rajendran (1993) point out that when investors are making invest decision, they will more likely to search for more information, this mean when the investors faces many investing relevant question, investors requires relevant information to assist with their purchase decision.
Prior research has shown that perceived quantity of information is a factor and can be influence investors' ratings of decision quality, consumer purchase satisfaction, and decision process satisfaction (Zhang and Fitzsimons 1999). The backbone of the decision making process is framing, gathering intelligence, coming to conclusions, and learning from experience."(Russo and Shoemaker 2002) In fact, most of the literature on decision-making includes some form of "information-seeking" component (Dawes, 1988; Fischhoff, Goitein, & Shapira, 1981; Janis & Mann, 1977; Nisbett & Ross, 1980; Paolucci et al., 1977). Consumers risk being confused by "information overload", investors cannot afford too many information in the same time and it can be difficulty and confusing the purchase decision process.
Information of fund is very important and should be served with written-text format to influence investors' attitudes and investment intentions associated with the specific fund. (John Kozup et. al 2008) Prior study stated that investors face mutual fund prospectuses full with data regarding a fund's return performance, management expenses, loads, and marketing fees, as well as details of the portfolio's holding. "Given the sufficient available information to investors for choose and picking the fund that most appropriately matches personal risk-return trade off is a challenging task even for the salted investors." (John Kozup et. al 2008)
Wide variety of information and choice has made investors feel more stressful and confusing when faced decision making process. Besides that, wide variety of information also will made investors has difficulty dealing with the complexity of mutual fund data in order to make investment decision. (John Kozup et. al 2008)
According to research on the cost-benefit principle (Payne 1982), well-structure displays of information minimize search costs for a decision maker. According to researcher John Kozup et. al (2008), based on the survey, a very low percentage of investors actually read the prospectus carefully. Therefore, graphically information has been shown more effectively to transmit risk information than numerical information (Stone, Yates, and Parker 1997).
"Advance fund performance will have little influence on investor's attitudes, investment intentions, expectations regarding future performance and perceived risk." (John Kozup, et. al 2008) However, used graphically information will help all of this to be more positive and perceived risk will be lower. Meanwhile, the provision of graphical supplemental information will interact with prior performance to influence investors' responses.
2.4.4 Risk of fund
"Individual risk aversion decreases with age. In addition, the life-cycle argument suggests that people's needs change as they age." (Riley and Chow 1992) Capon et. al (1992) explored the extent to which investors make purchase decision consistent with modern finance theory. The theory suggests that purchase decision for finance assets should be made on the basis of investors' beliefs regarding the future return and risk level of the assets (Elton and Gruber, 1989; Markowitz, 1959).
Based on 1990 Consumer Reports Survey of mutual fund investors, it found that past performance and level of risk were rated the two most important factors which can affect investors purchase decision. The researchers Elton and Gruber 1989; Markowitz 1959 said that return and risk of financial assets will affect investor decisions to invest in a fund family.
Mary Jane Lenard et. al (2003) develop a hybrid system that accepts input and analyzes an investor's attitude toward risk as well as provides an direction of whether investors should switch funds or not. It provides more information to the investor about financial performance of the fund compare to other, which can affects investors' purchase decision-making process. (Samant and Edwards, 2000) Therefore, Investor's mutual fund purchase decision would be influenced by consideration of risk-return trade-off, agency issues, and transaction costs. (Bruce A.Huhmann and Nalinaksha Bhattacharyya 2005)
Perceived risk used to influence investors' attitudes toward specific mutual fund and investors investment intentions. (John Kozup et. al 2008) Other researchers Hartman and Smith (1990) also found that the level of risk perceived by investors affected investment behavior. Prior studies suggest that large gains and losses affect investor risk behavior (Baker and Nofsinger, 2002; Shefrin, 2000; Thaler and Johnson, 1990). After earning large gain, the investment behavior of investors tends to become riskier with their investment decision, and vice versa.
2.4.5 Fund performance
A significant body of research suggests that past risk adjusted mutual fund performance helps predict future risk-adjusted performance (Elton and Gruber, 1989; Grinblatt and Titman, 1989). Consistent with these findings, there is some empirical evidence that mutual fund investors make purchase decisions on the basis of past performance (Kane 1990; Patel 1992)
According to Ippolito (1992), "flow-performance relationship is asymmetric in that while investors tend to invest in funds with strong past performance, they withdraw funds at a much slower rate after poor performance." Siri and Tufano (1998), Patel et al. (1990), and Ippolito (1992), report that investors generally invest in positive performance funds and divest from poor performing funds.
Harliss and Peterson (1998) found that when choosing mutual funds, investors will consider fund performance closely. Strong unit trust fund performance record is most important marketing tool for gaining new investors. (Thomas A.Feuerborn 2001) Other prior study also prove that fund with stronger past performance have higher flows (Warther 1995, Chevalier and Ellison 1997).
According to previous study, their finding got evidence to prove that mutual fund performance is major factor by most investors when making their investment decisions. (Jonanthan Michael LaBerge 2007) Investors may trend to fund performance to make a invest decision (John Kozup et. al 2008).
Typically, current investment decision are strongly influenced by the past performance of those investments such as mutual fund ( Coval and Shumway 2005; Johnson and Tellis 2005). " In fact, few are immune to the predictive power of the "hot hand effect," the term used to describe the bias that occurs when an observed trend that may be part of a random process is projected into the future," said by Andreassen 1988. This bias is encouraged from variety mutual fund advertisement by emphasizing the funds past performance (Johnson and Tellis 2005).
