Understanding the Risk Anatomy of Experienced Mutual Fund Investors

Abstract

Risk-return tradeoff comprises the critical rationale for every investment decision, where every investor wishes to assume maximum return at minimum risk. However, investors differ in their decisions to assume investment risk because of their personal constraints. This study examined the factors responsible for creating gaps in investors’ risk perception by focusing on three issues: (a) disclosure practices, (b) investors’ perception about the mutual funds’ services, and (c) risk anatomy. Avoiding the extreme investment avenues, the study has included mutual fund investors only because investment in mutual funds is put forth in a way that assumes calculated risk and assures maximum return. The results highlighted by the study revealed that investors’ demographic base, along with weak disclosure practices of mutual funds and the presence of volatility, shapes the anatomy of investors’ risk decisions. The major implications of the study highlight that investors’ demographic base has a significant impact on their risk perception, and financial services intermediaries should respond differently to the varied needs of individual investors based on their age, knowledge, income, and social responsibilities.