Redemption behavior of Individual Investors on various mutual funds

The primary purpose of This writing is to study the behavior of fund redemption done by investors by looking at the portfolio asset of One of the government bank in the period of 2005 until 2006 using regression test with a few variables to see the impact of these variables on the redemption magnitude. Literally, redemption behavior in the stock market is identical with disposition effect.

In the beginning this study is introducing shariah investment instrument in order to boost real economic sectors and to give alternatives to financing provided by conventional banking industry and introducing of the Wealth Management & Mutual Fund industry background accompanied with problem formulation, research scope & goal as well as the framework of this research in relation with individual investor behaviors. This section is followed by revealing the general framework utilized in behavioral finance by Daniel Kahneman and Amos Tversky (1979), and followed by the phycological phenomena and their development and accompanied with general development in mutual fund industry as well as research study by Investment Company Institute on mutual fund redemption by individual investors. Next, this research relies on regression methodology combined with non-parametrically hazard rate λ₀(t) (Han and Hausman(1990), Meyer(1990)) to see any probability on the redemption behavior when investor obtained accrued Gain or accrued Loss after purchasing fund. The combination of these two methodologies will result on an accurate as well as a robust output in order to measure redemption behavior on various mutual funds. The primary study is the daily asset appreciation and depreciation in the period of 2005-2006 with a purpose to see redemption behavior during and after crash as well as whether there is any different with a normal condition. A study done by Ivkovic, Zoran., & Scott Weisbenner,(2006) mentioned that mutual fund redemption was driven by the “absolute” performance of the fund.

The research also shows that in the year of 2005 until 2006, the decision making by individual investors in one of government bank for redemption is based exclusively on “absolute” fund performance. This finding can be concluded based on daily aggregate data used to construct Gain, Loss, Daily Return and Outflow. In addition, this research does not find any significant relation between variable Gain and redemption behavior shown by the coefficient Gain = 0.

The other finding shows that the volatility of certain mutual fund type can be bigger than any other type of mutual fund. For example, fixed income mutual fund has the biggest asset allocation of 44% in the period of 2005 and 36.7% in the period of 2006 (Bapepam), which could result in a bubble condition since the hazard rates in any type of mutual funds have the same magnitudes.

The challenge here is to understand how and what structure of investors’ behavior in redemption decision especially in the year of 2005 in relation with the significant hazard rate. For scholars the study help to conclude that Indonesian’ Mutual fund industry is erratically driven by macro economics condition. For mutual fund players, it is time to diversify products and gradually increase their competency in the industry, since investors demand has exceeded expectation from which, it is partly driven by innovative solutions offered by the industry.