Influence of Portfolio Diversification on Financial Performance of Mutual Funds in Nakuru County, Kenya

ABSTRACT: The financial performance of mutual fund is measured in terms of capital growth and periodical returns for growth and value funds respectively. Despite their late entry in the market, mutual funds have experienced a tremendous growth. This can be proven by the increased number of players and type of funds that are available. However more than 60 percent of funds did not match their market performance. The continued poor performance of mutual funds has resulted to lack of interest and confidence of investors, inefficiency in mutual funds management and imbalanced investment of available funds. The study sought to determine the influence of portfolio diversification on financial performance of mutual funds in Nakuru County, Kenya. The study specifically sought to assess the influence of portfolio diversification in bonds and diversification in shares on financial performance of mutual funds in Nakuru County, Kenya. The study adopted modern portfolio theory and arbitrage pricing theory. The study adopted the descriptive research design. The target population was 10 branch managers, 25 finance officers, 21 pension officers, 28 business development manager and 10 operations officers in mutual funds institutions therefore the total population of the study was 94 respondents. Nassiuma’s (2000) formula was used to get a sample size of 51 employees. The study made use of both primary and secondary data. Primary data was collected using structured questionnaires. Secondary data was collected from annual financial reports of the mutual funds. Quantitative data was analyzed by use of Statistical Package for Social Sciences (SPSS) version 24. Both descriptive and inferential statistics was employed in the study. Descriptive statistics involved the use of proportions and frequencies, measures of central tendencies (mean) and measures of dispersion (standard deviation). Data was presented in form of tables. The findings indicated that there exists a strong positive and significant relationship between portfolio diversification in bonds and financial performance of mutual funds with a regression coefficient of 0.641. The study also noted that there existed a positive, moderate statistically significant relationship between
diversification in shares and financial performance of mutual funds (r=0.597, P=0.018). The researcher recommended that mutual fund managers should adopt diversification policies to mitigate economic changes in
different industries. Investing in different industries that are negatively correlated eliminates systematic risk.
The inflation rate is less felt in some industries than others hence a diversified portfolio will achieve better
returns than undiversified ones.
Keywords: Financial Performance, Bonds, Shares and Portfolio Diversification