Journal of Business & Finance Librarianship, 20:133–158, 2015

Published with license by Taylor & Francis

ISSN: 0896-3568 print / 1547-0644 online
DOI: 10.1080/08963568.2015.977727

Analysis of Financial Literacy Level of Retail

Individual Investors of Gujarat State and Its
Effect on Investment Decision

HARSHA VIJAYKUMAR JARIWALA

Ganpat University, North Gujarat, India

This study attempts to assess the financial literacy level of retail

individual investors in the state of Gujarat, India and its effect on
their investment decision. The data collection instrument consisted
of a performance test and questionnaire. The performance test was
used to measure the financial literacy level of investors. The median
percentage of correct answer of the sample was considered to frame
the financial literacy level. Forty-four variables of investment deci-
sion were studied. Out of a total of 385 respondents, 39.20% of the
respondents are considered investors with a higher level of financial
literacy and 60.80% of respondents are considered investors with
a relatively lower level of financial literacy. This study found that
financial literacy does have a statistically significant effect on the
investment decision of investors.

KEYWORDS financial literacy, investment decision, regression

analysis

The current global economic crisis has sparked a heightened awareness of

the importance of financial literacy and the need for financial education.
The rapidly changing economic climate, coupled with the increasing com-
plexity of financial decisions, makes personal money management more
challenging than ever before. Consequently, economies around the world
increasingly consider financial literacy as a key pillar for the development

© Harsha Vijaykumar Jariwala

Submitted: 16 July 2014; Revision Submitted: 30 September 2014; Accepted: 6 October
2014.
Address correspondence to Harsha Vijaykumar Jariwala, Assistant Professor, Ganpat Uni-
versity, V. M. Patel Institute of Management, Department of Management, Ganpat Vidyanagar
– 384012, Mehsana Gozaria Highway, Kherva, Mehsana, North Gujarat, India. E-mail: callhar-
sha@gmail.com

133
134 H. V. Jariwala

of financial systems. In the last decade, financial literacy has gained the
attention of policy makers, regulators, governments, and several other or-
ganizations. Substantial efforts have been made and resources have been
developed by the financial education providers to promote financial literacy
through a multitude of financial education programs. The crucial challenge
faced by financial education providers is how to ensure that knowledge
transferred through financial education programs translates into increased
financial literacy and subsequent financial behavior by providing continuous
information and knowledge. Libraries are in the business of providing access
to free, objective, reliable information resources, so all citizens get oppor-
tunities to gain continuous knowledge and skills throughout their lives. By
unveiling vetted financial information tools and resources, the libraries may
help financial education providers to deliver knowledge on personal finance
more fully and effectively for our patrons These new set of tools provided
may enable the libraries to connect young people, seniors, and families
with trusted financial resources that will assist them in making informed
decisions.
Economic theory on investment decision treats investment decision of
the individuals as a macroeconomic aggregate and the microeconomic foun-
dations of it are drawn from intertemporal utility theory. Under the standard
assumption of this theory, decision makers are perfectly rational and able
to fully utilize all the information available. Accordingly, individuals maxi-
mize their utility based on classic wealth criteria, making a choice between
consumption and investment through time. It suggests that they make opti-
mum choices that maximize the expected value of their private utility, based
on preferences that are consistent across time and independent of context
profile.
However, some empirical research studies appeared in 1970s focused
on the individual rather than aggregate investor. They found that the assump-
tions of this traditional economic utility theory is unrelated to the reality of
everyday human being, and economists have long argued that they were
never meant to do so—rather, they provide mathematically tractable and
empirical reasonable approximations for modeling and analysis of actual
behavior.
A growing body of evidence across multiple domains of observed be-
havior however suggests that this rationale does not always hold true—it
finds systematic biases and anomalies as well as common decision making
heuristics that contradict the predictions of models populated solely by homo
economicus. The emerging field of behavioral economics and its related dis-
cipline, that is, behavioral finance, provide theoretical framework for this
study increasingly questioning the notion of absolute rationality. Rationality
itself is bound by context and directed to personal and community ends.
There is no one rational outcome for every financial decision. This discipline
also draws on insights from psychology and cognitive scientists to study
 Effect of Financial Literacy on Investment Decision 135

aspect(s) of individual behavior in various market settings and deviated

from this standard assumption. Although explaining behavioral economics,
researchers considered that three broad categories of anomalies or deviations
from the standard model, namely, nonstandard preference, nonstandard be-
liefs, and nonstandard decision making processes (DellaVigna, 2009). Glaser,
Noth, and Weber (2004) added that behavioral finance theory incorporates
findings from psychology and sociology into its theory and uses behavioral
finance models to explain investor behavior or market anomalies when ratio-
nal models fail to provide sufficient explanation. Researchers in behavioral
finance produced three major theoretical streams, namely, prospect theory,
regret aversion, and self-control.
The psychological phenomenon explains the reasons for which in-
vestors behave irrationally are representativeness heuristic, conservatism,
overconfidence, and self-attribution. Each of these research disciplines cap-
tured and analyzed behavioral attributes of individual investors related to his
or her own finances.
Theories of behavioral finance and behavioral economics assume that
people make irrational decisions. These theories are increasingly questioning
the notion of absolute rationality. Rationality itself is bound by context and
directed to personal and community ends. There is no one rational outcome
for every financial decision.
Decision making can be defined as the process of choosing a particular
alternative from a number of alternatives. It is an activity that follows after
proper evaluation of all the alternatives. Karlsson, Dellgran, Klingander, and
Gärling (2004) explained that individuals make decisions with regard to
their personal finances on a daily basis, and even though these decisions
are necessary for day-to-day survival, it can be a daunting task. The value
associated with analysis of the consumer decision-making process is widely
recognized by various researchers.
Previous research in the area of consumer behavior and financial ser-
vices has revealed that lifecycle stages, age, education, gender, and income
are important factors to consider when seeking to understand the needs and
wants of customers (Gerrans & Clark-Murphy, 2004; Gough & Sozou, 2005)
and the type of financial product or service being purchased greatly influ-
ences the consumers’ purchasing behavior (Beckett, Hewer, & Howcroft,
2000; Howcroft, Hewer, & Hamilton, 2003).
There is evidence that individual’s choice of decision is found to be
influenced by the following factors: decision-making complexity (Bettman &
Park, 1980; Johnson, Meyer, & Ghose, 1989) time pressure (Wright & Weitz,
1977), product knowledge and experience (Lee & Geistfeld, 1998; Moore
& Lehman, 1980), involvement and need for cognition (Mantel & Kardes,
1999), socioeconomic status (Capon & Burke, 1980; Lee & Geistfied, 1998),
and demographics (Darley & Smith, 1995) and various sources of information
(Chandra & Kumar, 2011).
136 H. V. Jariwala

With regard to factors influencing individual investors’ decision making,

Baker and Haslem (1974) contended that dividends, expected returns, and
firm’s financial stability are critical investment considerations for individual
investors. Merikas, Merikas, Vozikis, and Prasad (2003) studied 26 economic
variables that affect the individual investors in Greece. They did not rely on
single integrated approach, but rather on many categories of factors such
as accounting information, subjective/personal, neutral information, advo-
cate recommendation, and personal financial needs. This study found that
accounting information that includes condition of financial statements, ex-
pected corporate earnings, expected dividends, firm’s status in industry, af-
fordable share price, and past performance firm are the most influencing
factors on investment decision of investors. This study also found that envi-
ronmental criteria such as coverage in press, statement from politicians and
government officials, ease of obtaining borrowed funds, and political party
affiliation are the least important for individual investors.
Nagy and Obenberger (1994) examined factors influencing investors’
behavior. They studied 34 variables such as expected corporate earnings,
diversification needs, feeling for firm’s products and services, past perfor-
mance of the firm, broker/advisor/analyst’s recommendation to name a few.
The findings suggest that the classical wealth maximization criteria are im-
portant for investors. Contemporary concerns such as local and international
operations, environmental track record, and firm’s ethical posture appear to
be given only cursory considerations.
Hodge (2003) analyzed the investors’ perceptions of earning quality,
audit or independence, and the usefulness of audited financial information.
This study concluded that lower perceptions of earning quality are associated
with greater reliance on a firm’s audited financial statements and fundamental
analysis of those statements when making investment decisions.
Benston, Bromwich, and Wagenhofer (2006) concluded that investors
require a substantial amount of information that goes beyond financial ac-
counting numbers. They also require information about:

current and expected changes in market conditions, competitors’ prod-

ucts and performance, the potential value of new products and processes,
prospective changes in foreign exchange value and domestic inflation
rates, government policies, employee and customer relations, and the
quality of management. (p. 22)

Green Paper on Consumer Policy Framework (Republic of South Africa,

Government Gazette, 2004) states that more and more consumers are in-
terested in the world behind the products, the production process, and the
ethics of the company that produces goods and services. Blumberg, Kor-
swold, and Blum (1997) added that the stakeholders are always interested
in the extent to which the company is investing in social and related issues.
 Effect of Financial Literacy on Investment Decision 137

They always want to see company as a going concern. Epstein (1994) exam-
ined the demand for social information by individual investors. The results
of this study indicate a strong demand for information about product safety
and quality, and about the company’s environmental activities. Furthermore,
a majority of the investors surveyed also want the company to report on
corporate ethics, employee relations, and community involvement.
Chandra and Kumar (2011) explained that not only professional and
contextual sources of information, which include stock brokers, financial
consultants, and investment advisors, but also contextual factors, such as
market share and reputation of the firm, accounting and financial informa-
tion, publicly available information through various media, advocate recom-
mendation that of brokers, family and friends, and personal financial need
influence the investment decision of investors. They also found that investors
also follow technical analysis, fundamentals (accounting and financial infor-
mation), and market share of a company while investing.
Hussein et al. (2009) also identified 37 variables influencing investment
decision of United Arab Emirates investors. This study categorized 37 vari-
ables into eight groups. Eight variables corresponding to self-image/firm
image coincidence, 11 variables corresponding to accounting information,
six variables corresponding to neutral information, five variables to advocate
recommendation, and seven variables to personal financial needs. Securities
and Exchange Board of India (SEBI) and National Council of Applied Eco-
nomic Research (NCAER) (2011) reported that safety and liquidity were the
primary considerations that determined the choice of asset to invest in.
Literature also establishes relation between individuals’ demographic
and socioeconomic variables and behavioral finance related to investment
decision. There is evidence that women are less confident (Clark-Murphy
& Gerrens, 2002; Taylor, 2003) and less knowledgeable (Chen & Volpe,
1998) than men on the topics of personal finance. Males generally exhibit
more confidence in dealing with financial affairs (Taylor, 2003), whereas
women are more conservative in their investment practices (Bajtelsmit &
Bernasek, 1996). Age is another demographic factor that affects investment
decision of investors (Korniotis & Kumar, 2011). Harrison (2003) claimed that
the past investment experience and expertise often influence the investors’
decision with regard to purchase of financial products. Lewellen, Lease, and
Schlarbaum (1977) suggested investors with lower age, young, higher level
of income, higher level of education, and less family members choose to
invest their money in risky assets rather than conservative instruments.
The behavioral finance literature suggests that investment decision is
not only influenced by the demographics and socioeconomic variables, but
also by risk tolerance capacity and amount of financial information available
to the investor, as well as his/her information processing capacity to analyze
the environmental set.
138 H. V. Jariwala

Literature review supports that investors’ investment decisions are distin-

guished by extent of their activity, demographics and socioeconomic profiles,
saving motives, risk tolerance capacity, their motivation and ability to search
the financial information, and to process the same for making investment
decision, which in turn also gets influenced by other variables. In this whole
process, level of their sophistication (that investors possess), among other
things, also plays a crucial role in this process. In the literature, this level of
sophistication is also referred to as “level of financial literacy.”
In India, policy makers have recognized financial literacy as an essen-
tial life skill. Developing and promoting financial literacy through financial
education has become an important policy priority to complement finan-
cial consumer protection, inclusion and prudential regulation. Several or-
ganizations jointly work to deliver financial education including regulatory
authorities, banks, NGOs, financial planners, financial services institutions,
self-regulatory organizations, employers, and so on. In India, the govern-
ment has set up the Investors Education and Protection Fund (IEPF) with the
objective to support activities relating to investor education, awareness and
protection. The role of IEPF is to educate, empower and protect investors
by equipping them with information and fundamental knowledge and skills
to evaluate their saving/investment/credit options, and enabling them to un-
derstand the implications of alternative financial decisions. At present, there
is no baseline data available in the Indian context with regard to financial
literacy, even though efforts to promote financial literacy through financial
education have been going on for several years. Accordingly, the key re-
search questions for this study are framed. At present what is the existing
level of financial literacy that investors possess? Does this financial literacy
level have any significant effect on investment decision of investors? Attempt-
ing these research questions, this study may provide useful insight to those,
who are in the field of financial literacy.

METHOD
Participants
This study was conducted in the state of Gujarat, which is one of the progres-
sive states of India. According to the population census of India (Government
of India, 2011), the literacy rate in Gujarat shows an upward trend and is at
79.31%. Of that, male literacy stands at 87.23%, whereas female literacy is at
70.73%. In 2011, the literacy rate in Gujarat stood at 69.14% of which males
and females were 78.49% and 57.80% literate, respectively (Government of
Gujarat, 2011, p. 30).
For this study, exploratory and descriptive research design methods
have been used, wherein the researcher has explored the financial literacy
level of investors and then described the effect of financial literacy level
 Effect of Financial Literacy on Investment Decision 139

on investment decision of investors. The retail individual investors1 (older

than age 18 years) of Gujarat State are considered as a population for this
study. Households in the state of Gujarat who make investments in finan-
cial instruments are considered as sampling unit. For this study sample is an
Individual. Total sample size of 385 investors in the state of Gujarat is consid-
ered for the study. Table 1 provides descriptive statistics for the respondents’
characteristics.

Material
Data collection was done through primary and secondary sources. A detailed
performance test and questionnaire were prepared and administered on in-
vestors in the State of Gujarat. To serve this objective, the research instrument
was divided into three sections. Section A comprises performance test on ob-
jective type and true/false type questions (total 20 questions) based on basic
financial literacy. Section B comprises questionnaire for investment decision.
The last section of the research instrument was Section C that consisted of
questions based on demographic and socioeconomic variables.
The research instrument follows a specific format. Each of the three sec-
tions includes several questions, each of which is described by an objective.
Section A consists of Performance Test to measure financial literacy level
possessed by the investors. Literature on financial literacy documented that
there are two approaches that have been employed to measure financial
literacy. Performance tests are principally knowledge based, reflecting con-
ceptual framework and/or construction. Most of the measurement of financial
literacy has focused on the cognitive aspects of the concept and what peo-
ple know or understand about financial matters because “to be financially
literate, individuals must demonstrate knowledge and skills needed to make
choices within a financial marketplace” (Huston, 2010, p. 309–310). The per-
formance test as a method for measurement of financial literacy is most often
conducted using a set of multiple-choice test questions and/or true–false test
questions that are included in a larger survey instrument that asks about
general or specific financial matters and behaviors (e.g., Hilgert, Hogarth, &
Beverly, 2003; Lusardi & Mitchell, 2007; Lusardi, Mitchell, & Curto, 2010).
In contrast, a self-reported method assesses perceived knowledge or
confidence in knowledge (i.e., how much you think you know). The
mismatch between self-assessed financial knowledge and actual under-
standing of financial concepts may lead to overconfidence in the re-
spondents/investors. Substantial academic literature in cognitive psychology
makes the case that people are usually overconfident and in particular, they
are overconfident about the precision of their knowledge (Odean, 1998).
Literature has also documented that in general; people tend to overestimate
their ability to do well at tasks, are unrealistically optimistic about future
140 H. V. Jariwala

TABLE 1 Respondents’ Profile

Variables Categories Frequency Percentage

Gender Male 305 79.23

Female 80 20.77
Age Group 18–25 years 89 23.11
26–35 years 76 19.74
36–45 years 96 24.93
46–55 years 75 19.48
56–65 years 49 12.72
66 years and older 0 0.00
Education Primary 24 6.23
Secondary 45 11.68
Higher secondary 46 11.94
Diploma 29 7.53
Graduation 119 30.90
Postgraduation 122 31.70
Monthly income (INR) 10,000 and less 95 24.70
10,001–15,000 85 22.10
15,001–20,000 83 21.60
20,001–25,000 78 20.30
25,001 and above 44 11.40
Stage in family life cycle Young single 67 17.40
Young married without children 67 17.40
Young married with children 95 24.67
Middle age married with children 101 26.23
Middle age married without 33 8.57
dependent children
Older married 22 5.71
Older unmarried 0 0.00
Employment structure Full-time salaried 228 59.22
Part-time salaried 42 10.90
Casual 10 2.59
Self-employed 67 17.14
Housewife 14 3.63
Retired 20 5.19
Unemployed 2 0.51
Others 2 0.51
Type of workplace activity Finance related work activity 133 34.50
Non finance related work activity 242 62.90
Other 10 2.60
Years of work experience Fewer than 5 71 18.44
6 years–10 years 63 16.36
11 years–20 years 77 20.00
21 years–30 years 113 29.35
More than 30 years 61 15.85
Note. INR = Indian currency.

events and have unrealistically positive self-evaluations. International finan-

cial literacy research studies suggest that overconfidence regarding financial
knowledge and understanding is a significant issue that affects the degree to
which people seek financial information and advice, and the financial de-
cisions that they subsequently make (Lusardi & Mitchell, 2006). An Organi-
 Effect of Financial Literacy on Investment Decision 141

zation for Economic Co-operation and Development (OECD2) report (2005)

discusses research across 12 countries that found that respondents felt they
knew more about financial matters than was actually the case (consumers of-
ten think that they know more than they actually do (ACNielsen, 2005). This
was particularly clear in research which combined objective tests (that mea-
sured knowledge and understanding of financial terms and ability to apply
financial concepts to particular situations), with self-assessment (respondents’
perceptions of their financial understanding and knowledge (OECD, 2005).
Therefore, to overcome the limitation of overconfidence reflected in the self-
reported method of measuring financial literacy, the researcher has gone for
the performance test. Section B includes variables that influence investment
decision of investors and lastly, section C comprises demographic and so-
cioeconomic profiles of respondents. In-depth explanation of the research
instrument is given below.
To measure basic financial literacy level (skills, knowledge, and under-
standing of basic financial concepts, principles and numeracy that individual
should possess), 20 questions were asked to the respondents in Section A.
Out of these, 13 questions were taken from the scale developed by Maarten
van Rooij, Annamaria Lusardi, and Alessie Rob (2009). These questions rang-
ing from numeracy, interest compounding, inflation, time value of money,
functioning of stock market, diversification, risk-return trade-off of two as-
sets, risk, money illusion, relationship between investment time horizon and
fluctuation, concept of asset allocation, and relationship between interest
and asset price. The rest of the seven questions were based on investment
concept, financial worth, disposable income, understanding of types of ac-
counts, consumer right and responsibility, knowledge of authority and Know
Your Customer (KYC).
In Section B, the researcher has employed 44 variables influencing in-
vestment decision of investors modified from that used by Hussein A. Hassan
Al-Tamimi and Al Anood Bin Kalli (2009). The rating question and data was
collected on 5-point Likert-type scale ranging from 1 (least influence) to 5
(highly influence). Section C focuses on personal information of respon-
dents, including respondents’ demographic and socioeconomic variables.
The questions based on age, gender, higher level of education attempted,
monthly income, stage of family life cycle, employment structure, type of
workplace activity, and years of work experience are included in this sec-
tion. These variables are drawn from the previous research studies done in
the financial literacy and related fields.

Procedure
Nonprobability convenient sampling technique is chosen to collect primary
data. Personal (face-to-face) interviews of the respondents were performed.
142 H. V. Jariwala

For the purpose of primary data collection, the researcher has approached
various investors’ associations operating in the different cities of Gujarat
with the objective of promoting investors’ awareness. The researcher has
approached the individual retail investors (respondents) at various investors
awareness programs conducted by these associations in collaboration with
Securities and Exchange Board of India and The Bombay Stock Exchange
Ltd. (BSE) under the IEPF. The researcher has distributed and collected the
filled-up questionnaires from the respondents before the investor awareness
programs would begin. The investors were invited to attend these programs
by an open invitation given as an advertisement in the newspapers. The
survey was developed to investigate the financial literacy level of investors
and its effect on investment decision.

RESULTS

In this section, the results of data analysis of primary data are presented.

Data Reliability and Normality

The most widely used reliability measure is Cronbach’s alpha (α). Hair,
William, Barry, Anderson, and Tatham (2009) suggested the generally agreed-
upon lower limit for Cronbach’s α is 0.7, though it may decrease to 0.60 in
exploratory research (Hair et al., 2009). The Cronbach’s α coefficient value
for 44 variables influencing investment decision scale is 0.794, indicating the
high level of internal consistency in the items. This value of Cronbach’s α is
acceptable and desirable, as this value is greater than 0.700, confirming that
the scale is reliable enough to be used for further analysis.

Data Quality and Normality Check

Data quality is examined by using skewedness, kurtosis, and t-test values as
shown in the Table 2. A close examination of fifth column in Table 2 reveals
that kurtosis for majority of variables is below than 1. Out of 44 variables
influencing investment decision only kurtosis of eight factors are greater
than one and approaching to 2.00, a level beyond which non-normality of
distribution becomes a concern (see Table 2).
According to kurtosis, data for 44 variables influencing investment de-
cision are normally distributed. Also, referring to fourth column of Table 2
indicates that, skewedness for all the 44 variables influencing investment
decision is less than 0.94, far smaller than the lower bound of four or five.
Thus, kurtosis and skewedness of the variables provide indication that the
 Effect of Financial Literacy on Investment Decision 143

TABLE 2 Data Quality for Variables Influencing Investment Decision

Significance
Variables Mean SD Skewness Kurtosis t test (2-tailed)

Condition of financial statement 4.05 0.65 –0.05 –0.59 123.07 0.00

Expected Corporate Earning 2.72 1.04 0.92 0.14 51.09 0.00
Past performance of the firm 3.98 0.68 0.02 –0.83 114.86 0.00
Company’s position in the industry 3.91 0.69 0.12 –0.91 110.86 0.00
Insider’s information 3.87 0.72 0.20 –1.07 105.09 0.00
Result of fundamental analysis 2.94 1.19 0.46 –0.82 48.39 0.00
Result of technical analysis 2.88 1.23 0.61 –0.75 45.90 0.00
Expected return on investment 4.03 0.63 –0.02 –0.44 126.40 0.00
Feeling for a company 3.29 1.00 0.09 –0.96 64.29 0.00
Perceived ethics of company 4.11 0.66 –0.12 –0.73 121.59 0.00
Political party affiliation 3.20 1.01 –0.02 –0.56 62.34 0.00
Contribution of a firm towards 3.22 0.96 0.04 –0.65 65.99 0.00
social causes
Coverage in the press 3.22 1.27 0.43 –1.51 49.53 0.00
Recent price movements in a firm’s 2.83 1.28 0.64 –0.86 43.44 0.00
stock/Net Asset Value
Statements from politicians and 3.29 0.87 0.07 –0.31 74.38 0.00
governmental officials
Fluctuations/developments in the 3.64 0.95 –0.35 –0.78 75.22 0.00
indices of the major market
Current economic indicators 3.26 0.82 –0.12 –0.28 78.31 0.00
Reputation of a company in the 3.38 0.90 –0.36 –0.79 74.02 0.00
domestic market
Reputation of a parent company or 4.07 0.61 –0.04 –0.36 129.92 0.00
sister concern
Environmental record 3.64 0.64 0.50 –0.67 111.03 0.00
Market capitalization of company 3.83 0.83 –0.54 0.35 91.00 0.00
Conversation/exchanges of views 2.94 1.12 0.89 –0.66 51.32 0.00
with professional colleagues
Publication in the financial press, 2.97 1.05 0.79 –0.50 55.57 0.00
newspapers and electronic media
Conversation/exchanges of views 3.97 0.65 0.03 –0.61 120.03 0.00
with company executives and
sector experts
Studying the portfolio investments 3.77 0.65 0.26 –0.69 114.68 0.00
of other market players
Corporate forecast prepared by 2.48 0.86 0.79 1.08 56.84 0.00
independent investment company
Economic forecasts by research 2.90 1.12 0.68 –0.43 50.73 0.00
institutions
Study of Annual Reports 4.09 0.69 –0.13 –0.91 115.83 0.00
Family members 3.58 0.95 –0.40 –0.25 74.07 0.00
Friends and relatives 3.73 0.95 –0.63 0.08 77.44 0.00
Present investors 3.67 0.89 –0.16 –0.73 80.53 0.00
Financial advisors/Broker and 3.87 0.60 0.05 –0.30 126.90 0.00
analyst’s recommendation
Rating agencies’ reports 4.17 0.60 –0.09 –0.38 136.20 0.00
Diversification needs 4.14 0.71 –0.20 –0.98 115.05 0.00
Liquidity associated with investment 2.91 1.26 0.08 –1.10 45.22 0.00
Availing the benefit of income tax 3.44 1.25 0.09 –1.62 54.11 0.00
deduction
(Continued on next page)
144 H. V. Jariwala

TABLE 2 Data Quality for Variables Influencing Investment Decision (Continued)

Significance
Variables Mean SD Skewness Kurtosis t test (2-tailed)

Risk-return trade off 3.98 0.61 0.01 –0.33 127.20 0.00

Minimizing risk 4.01 0.64 –0.01 –0.51 123.79 0.00
Ease of obtaining borrowed fund 3.03 1.42 –0.01 –1.38 41.67 0.00
Preferred investment time horizon 2.74 1.15 0.42 –0.60 46.65 0.00
Safety associated with investment 2.98 1.31 0.18 –1.16 44.59 0.00
Affordable minimum investment 2.77 1.49 0.31 –1.40 36.55 0.00
amount
Ease in liquidity 4.03 0.65 –0.03 –0.63 121.44 0.00
Guaranteed return 2.57 1.16 0.83 0.04 43.50 0.00

data are distributed normally. The t-test scores, as in the last column of Ta-
ble 2 indicates that mean score of the respondents on 5-point Likert-type
scale are significantly different for all 44 variables influencing investment
decision. These reliability and normality of results permit the researcher to
use these data for further statistical analysis.

Methodology Used to Measure Financial Literacy Level

To measure the financial literacy of respondents, investor/respondents’ total
score was calculated as the percentage of correct answers (Lyons, Rach-
lis, & Scherpf, 2007), by attempting the total twenty questions. The median
percentage of correct answers of the sample was considered as a base to
frame financial literacy level and/or to classify the subgroups. The respon-
dents with scores above median are considered as respondents with higher
financial literacy and hence classified as higher financially literate and re-
spondents with equal and/or below median are considered as respondents
with relatively lower level of financial literacy and hence classified as lower
financially literate.
Frequency analysis reports values of mean and median percentage of
correct scores for the entire survey, calculated on the basis of survey re-
sponses collected from each investor (respondent). The result shows that on
an average, respondent answered 56.53% of the questions correctly. The me-
dian percentage of correct scores is 60.00. This median percentage of correct
scores of the sample was considered to frame financial literacy level and/or
to classify the respondents in to different subgroups. The respondents with
scores above median (i.e., 60%) are considered as respondents (investors)
with higher financial literacy and hence classified in the first category, that
is, investors with relatively higher level of financial literacy and respondents
with equal to and lower than median (i.e. 60%) are considered as respon-
dents with relatively lower level of financial literacy and hence classified
 Effect of Financial Literacy on Investment Decision 145

into second category, that is, investors with relatively lower level of financial
literacy.
The overall results show that out of 385 respondents, 39.20% respon-
dents (n = 151) scored higher than the median, which is 60.00, and hence
these respondents are considered as investors with higher level of financial
literacy. The rest of the 60.80% of respondents (n = 234) have scored equal
and/or below median. These investors are considered as investors with rela-
tively lower level of financial literacy and hence classified as lower financially
literate.
The overall performance of the respondents towards twenty questions
of basic financial literacy is presented in Table 3. The second column of
this table represents the percentage of total respondents who answered each
question correctly. On the basis of percentage of correct answers to each
question, sorting was done and the rank was assigned. From Table 3, it can
be seen that the respondents earned highest score on the question of nu-
meracy, suggesting that investors know this concept very well. Nine other
subject questions had scores higher than the median. In the ascending order
(on the basis of ranks assign) these subjects are consumer rights and re-
sponsibility, concept of Know Your Customer (KYC), interest compounding,
functioning of stock market, relationship between investment time horizon
and fluctuation in asset value, diversification, inflation, risk-return trade-off,
and risk-return trade-off of two assets. On the other hand, the subject ques-
tions on which the respondents scored less than the median are concepts of
investment, financial worth, risk, relationship between investment time hori-
zon and asset growth, personal finance, time value of money, relationship
between interest and asset prices, regulatory as a part of market structure,
concept of asset allocation, and disposable income.

Financial Literacy and Investment Decision

To study the second research question, that is, “Does financial literacy have
any significant effect on investment decision of investors?” the following
hypothesis was framed:

Hypothesis: Financial literacy level of investors does not have significant

effect on their investment decision.

The linear regression was used to assess the “statistical significance”

of the estimated relationships. The independent variable weighted by the
regression analysis procedure to ensure its maximal prediction on the value
of dependent variable. In regression analysis, weight denotes the relative
contribution of independent variable to the overall prediction and facilitates
146
TABLE 3 Summary of Answers Given by the Respondents Under Basic Financial Literacy Test

No. of Percentage of
Respondents Respondents No. of Percentage of No. of Percentage of
Given Given Respondents Respondents Respondents Respondents
Correct/True Correct/True Given False Given False Given Answer Given Answer
Basic Financial Literacy Subject Question Answers Answers Answers Answers of Don’t know of Don’t know Rank

Investment concept 200 51.95 172 44.67 13 3.38 11

Financial worth 193 50.13 154 40.00 38 9.87 12
Disposable income 87 22.60 213 55.32 85 22.08 20
Personal finance 162 42.08 160 41.56 63 16.36 15
Numeracy 311 80.78 59 15.32 15 3.90 1
Interest compounding 295 76.62 66 17.14 24 6.23 4
Inflation 265 68.83 82 21.30 37 9.61 8
Time value of money 160 41.56 176 45.71 49 12.73 16
Functioning of stock market 282 73.25 80 20.78 23 5.97 5
Concept of diversification 266 69.09 96 24.94 23 5.97 7
Risk-return trade off 253 65.71 93 24.16 39 10.13 9
Risk 186 48.31 180 46.75 19 4.94 13
Risk-return trade off of two assets 251 65.19 91 23.64 43 11.17 10
Relationship between investment time 181 47.01 166 43.12 38 9.87 14
horizon and asset growth
Investment time horizon and fluctuation 275 71.43 86 22.34 24 6.23 6
in asset value
concept of asset allocation 106 27.53 208 54.03 71 18.44 19
Relationship between interest and asset 159 41.30 191 49.61 35 9.09 17
prices
Consumer rights and responsibility 309 80.26 60 15.58 16 4.16 2
Regulatory body as a part of market 107 27.79 192 49.87 86 22.34 18
structure
Concept of Know Your Customer 304 78.96 39 10.13 42 10.91 3
 Effect of Financial Literacy on Investment Decision 147

interpretation as to the influence of independent variable in making the

prediction.
Thus, regression analysis with a single explanatory variable is termed
“simple regression.” Then, the hypothesized relationship between financial
literacy and investment decision may be written as:

I = α + βE + ε

where,
variable I = the “dependent” variable (I = investment decision)
E = “independent,” or “explanatory,” variable (E = financial literacy level)
α = the “constant term”
β = the “coefficient” of the variable E (financial literacy level) andε is the
error term associated with the observation.
One of the most widely used statistical techniques is simple linear re-
gression. This technique is used to relate a measured response variable, Y , to
a single measured predictor (explanatory) variable, X, by means of a straight
line. It uses the principle of least squares to come up with values of the “best”
slope and intercept for a straight line that approximates the relationship. The
purpose of simple linear regression is to come up with a straight line that
captures the relationship between the predictor and the response variable.

DISCUSSION

Regression analysis was performed to assess whether financial literacy level

does have any significant effect on investment decision of investors. For this,
financial literacy level was considered as an independent variable and nine
factors extracted by factor analysis (out of 44 variables of investment deci-
sion) independently and simultaneously are taken as factors of investment
decision and are considered as dependent variables. These nine factors are
presented in Table 4 with their respective mean values. Further, to show the
overall impact of financial literacy level (FLL) on investment decision, the
sum of all nine investment factors are considered as dependent variable to
run the regression analysis.
The correlation analysis was performed to check whether independent
variable and dependent variable are correlated. The results reported that fi-
nancial literacy level is not significantly correlated with Factor 2 (Accounting,
Business and Financial Information, r = .042, p > .01), Factor 3 (Economic
and Regulatory Environment, r = –.022, p > .01), Factor 4 (Operational
Feedback, r = .042, p > .01), Factor 7 (Credit Features, r = .045, p > .01),
and Factor 8 (Personal Inclination, r = –.057, p > .01). For the rest of the fac-
tors, financial literacy level is found to be correlated with Factor 1 (Personal
148 H. V. Jariwala

TABLE 4 Mean Score of Extracted Factors

Factor Factor Name Grand Mean Value

Factor 1 Personal Financial Need 3.02

Factor 2 Accounting, Business and Financial Information 3.98
Factor 3 Economic and Regulatory Environment 3.25
Factor 4 Operational Feedback 3.66
Factor 5 Advocate Recommendation 3.74
Factor 6 Overall Group Performance 3.24
Factor 7 Credit Features 4.07
Factor 8 Personal Inclination 3.70
Factor 9 Monetary Expectation 4.03

TABLE 5 Coefficients (Financial Literacy Level and Factor 1: Personal Financial Need)

Unstandardized
Coefficients
Standardized Coefficients
Model b Std. Error β t Significance

1 (Constant) 0.512 0.071 7.174 0.000

Level 1.752 0.048 0.882 36.595 0.000

Note. Dependent variable: Factor 1, R 2 = .778, F(1, 384) = 1.339, p < .05.

Financial Need, r = .882, p < .01), Factor 5 (Advocate Recommendation,

r = .261, p < .01), Factor 6 (Overall Group Performance, r = .352, p < .01),
and Factor 9 (Monetary Expectation, r = .090, p < .10). Financial literacy
level is also found to be significantly correlated with sum of all investors
factors (r = .513, p < .01). These values of r suggest a strong positive linear
correlation since the value is positive and close to 1.
Correlation analysis reported that financial literacy level is strongly cor-
related Factor 1, Factor 5, Factor 6 and Sum of all Investment Factors. This
has permitted the researcher to conduct the regression analysis to find out
the extent of this relationship.

Financial Literacy Level and Factor 1: Personal Financial Need

The results of regression analysis performed to measure whether the variation
in personal financial need (dependent variable) is significantly predicted by
variation in financial literacy level (independent variable) are presented in
Table 5.
Results of the regression analysis reported that these two predictors
explained 77.8% of the variance, that is, 77.8% of variance in investor’s
personal financial need (as a factor of investment decision) can be predicted
by his or her financial literacy level, R 2 = .778, F(1, 384) = 1.339, p < .01. In
other words, 22% (1.000–0.778 = .222) of investor’s personal financial need
cannot be predicted by his or her financial literacy level. The regression
 Effect of Financial Literacy on Investment Decision 149

TABLE 6 Coefficients (Financial Literacy Level and Advocate Recommendation)

Unstandardized
Coefficients
Standardized Coefficients
Model b Std. Error β t Significance

1 (Constant) 3.384 0.070 48.044 0.000

Level 0.250 0.047 0.261 5.032 0.000

Note. Dependent variable: Factor 5, R 2 = .068, F(1, 384) = 28.112; p < .05.

equation appears to be very useful for making this prediction, because the
value of R 2 is close to 1. The result of F test shown in Table 5 is also significant
with value of 0.000, which allows a researcher to determine whether the
linear regression was statistically significant. This indicates that model is
statistically significant at a confidence level of 95%. Accordingly, following
regression equation is derived:

Personal Financial Need = 0.512 + 1.752 (FLL)

This factor consists of six variables: availing the affordable minimum

investment amount, safety associated with investment, ease of obtaining
borrowed fund, preferred investment time horizon, liquidity associated with
investment, and availing the benefit of income tax deduction. Nagy and
Obenberger (1994) and Hussein and Al Anood Bin Kalli (2009) examined
that personal financial needs of an individual investor mostly influence the
investment decision. They also found that financial literacy is positively cor-
related with personal financial needs of the investors. Nagy and Obenberger
(1994) also added that “perhaps sophisticated investors view investment capi-
tal and consumption expenditures independent entities” (p. 67). The findings
support that financially literate consumers develop the skills and confidence
to become more aware of financial risks and opportunities to make informed
choices by considering their own financial needs.

Financial Literacy Level and Factor 5: Advocate Recommendation

The results of regression analysis performed to measure whether the variation
in advocate recommendation (dependent variable) is significantly predicted
by variation in financial literacy level (independent variable) are presented
in Table 6.
Results of regression analysis reported that these two predictors ex-
plained 6.8% of the variance, that is, 6.8% of variance in advocate recom-
mendation (as a factor of investment decision) can be predicted by investor’s
financial literacy level, R 2 = .068, F(1, 384) = 28.112, p < .01. The result of
F test shown in Table 6 is also significant with value of 0.000, which allows
150 H. V. Jariwala

TABLE 7 Coefficients (Financial Literacy Level and Overall Group Performance)

Unstandardized
Coefficients
Standardized Coefficients
Model b Std. Error β t Significance

1 (Constant) 2.540 0.101 25.107 0.000

Level 0.500 0.068 0.352 7.368 0.000

Note. Dependent variable: Factor 6, R 2 = .124, F(1, 384) = 54.283, p < .05.

a researcher to determine whether the linear regression was statistically sig-

nificant. This indicates that model is statistically significant at a confidence
level of 95%. Accordingly, following regression equation is derived:

Advocate recommendation = 3.384 + 0.250(FLL)

Four variables rating agencies’ reports, financial advisors/brokers and

analyst’s recommendation, conversation/exchanges of views with profes-
sional colleagues, and conversation/exchanges of views with company ex-
ecutives and sector experts variables are grouped under “Advocate Recom-
mendation,” Nagy and Obenberger (1994) said that:

advocate recommendation includes purchase recommendations from

brokerage houses, individual stock brokers and co-workers. This study
also added that these information sources could be constructed as a
recommendation from sources with vested interested in the investor’s ul-
timate actions. Although, many investors obviously rely on professional
expertise. (p. 67)

The researcher may conclude that financially literate investors know where
to go for a help to seek advice or if things go wrong. This can be seen
in their investment decision as regression analysis confirms the effect of
financial literacy level of investors on advocate recommendations as a factor
of investment decision.

Financial Literacy Level and Factor 6 Overall Group Performance

The results of regression analysis performed to test if the overall group
performance (as a factor for investment decision) is significantly predicted
by financial literacy level of investors are presented in Table 7.
Results of regression analysis reported that these two predictors ex-
plained 12.4% of the variance, that is, 12.4% of variance in overall group
performance (as a factor of investment decision) can be predicted by in-
vestor’s financial literacy level, R 2 = .124, F(1, 384) = 54.283, p < .01. The
 Effect of Financial Literacy on Investment Decision 151

TABLE 8 Coefficients (Financial Literacy Level and Monetary Expectation)

Unstandardized
Coefficients
Standardized Coefficients
Model b Std. Error β t Significance

1 (Constant) 1.121 .163 6.868 .000

Factor 9 .071 .040 .090 1.777 .076

Note. Dependent variable: Factor 9, R 2 = .008, F(1, 384) = 3.157, p < .90.

result of F test shown in Table 7 is also significant with value of 0.000,

which allows a researcher to determine whether the linear regression was
statistically significant. This indicates that model is statistically significant at
a confidence level of 95%. Accordingly, following regression equation is
derived:

Overall Group Performance = 2.540 + 0.500 (FLL)

The three variables identified under Factor 6 are result of technical

analysis, result of fundamental analysis, and company’s position in the in-
dustry. The group of these variables is named as “Overall Group Perfor-
mance.” Chandra and Kumar (2011) argued that the group of these variables
shows prudence and precaution attitude. They also added that each variable
included under this factor is associated with different behavioral attitude.
These variables underline the symmetric behavioral attitude of risk aversion,
where, financially literate investors can identify the risk and consequences
of wrong decision, and hence they involve themselves in various risk mit-
igating techniques and do various analysis to mitigate the risk associated
with the investment. This behavioral factor supports that investors do care-
ful scanning of environment, that includes economy, industry and company
analysis in-depth and this factors does have a significant influence on their
investment decisions.

Financial Literacy Level and Factor 9 Monetary Expectation

The results of regression analysis performed to test if the monetary expecta-
tion (as a factor for investment decision) is significantly predicted by financial
literacy level of investors are presented in Table 8.
Results of the regression reported that these two predictors explained
8% of the variance, R 2 = .008, F(1, 384) = 3.157, p < .10. The result of
F test shown in Table 8 is also significant with value of 0.076, which al-
lows a researcher to determine whether or not the linear regression was
152 H. V. Jariwala

TABLE 9 Coefficients (Financial Literacy Level and Sum of Investment Decision Factors)

Unstandardized
Coefficients
Standardized Coefficients
Model b Std. Error β t Significance

1 (Constant) 3.118 0.038 82.171 0.000

Level 0.298 0.025 0.513 11.696 0.000

Note. Dependent variable: Overall Factors, R2 = .263, F(1, 384) = 136.794, p < .05.

statistically significant. This indicates that model is statistically significant at

a confidence level of 90%. Accordingly, following regression equation is
derived:

Monetary Expectation = 1.121 + 0.071 (FLL)

Only one variable was identified under Factor 9, expected return on

investment. It is named as “Monetary Expectation” as while making invest-
ment decision, individual always looks to collect the information about the
pattern of profit distribution and starts to expect the return to compensate
the risk associated with investment. Nagy and Obenberger (1994) suggested
that monetary expectation can be considered as a classic factor that focuses
on wealth maximization criterion. This study confirms the effect of financial
literacy on monetary expectation as a factor of investment decision. The re-
searcher may conclude that the financially literate investors may study the
risk and return profile of various investment opportunities to enhance their
financial well-being.

Financial Literacy Level and Sum of Investment Decision Factors

Finally, to check if financial literacy level does have a significant effect on
investment decision of investors, the sum of investment decision factors
was considered as a dependent variable and financial literacy level was
considered an independent variable and regression analysis was performed.
The results are presented in Table 9.
Results of the regression analysis reported that these two predictors
explained 26.3% of the variance. From the Table 9, it can be seen that the
R 2 value is 0.263, which shows 26.30% of variance in investors’ investment
decision can be predicted by his or her financial literacy level, R 2 = 0.263,
F (1, 384) = 136.794, p < .10. The result of F test shown in Table 9 is
also significant with value of 0.000 (p < .05). This indicates that model is
statistically significant at a confidence level of 95%. Hence, a null hypothesis
is rejected and it may be concluded that financial literacy level of investors
 TABLE 10 Summary of Regression Analysis of Financial Literacy Level and Investment Decision

Results of Regression
Results of Correlation
S.E. of
Factors r Significance R2 Adjusted R 2 Estimates Beta t Value Significance F Test Significance

Personal Financial Need 0.882 0.000∗ 0.778 0.777 2.462 0.882 36.59 0.000∗ 1.339 0.000∗
Accounting, Business and 0.042 0.416 0.002 0.000 0.526 0.042 0.814 0.416 0.663 0.416
Financial Information
Economic and Regulatory –0.022 0.673 0.000 –0.002 0.622 –0.022 –0.423 0.673 0.179 0.673
Environment
Advocate 0.042 0.416 0.002 0.000 0.827 0.042 0.815 0.416 0.664 0.416
Recommendation
Operational Feedback 0.261 0.000∗ 0.068 0.066 0.456 0.261 5.032 0.000∗ 28.112 0.000∗
Overall Group 0.352 0.000∗ 0.124 0.122 0.654 0.352 7.368 0.000∗ 54.283 0.000∗
Performance
Credit Features 0.045 0.382 0.002 0.000 0.566 0.045 0.876 0.382 0.767 0.382
Personal Inclination –0.057 0.266 0.003 0.001 0.670 –0.057 –1.114 0.266 1.240 0.266
Monetary Expectations 0.090 0.076∗∗ 0.008 0.006 0.624 0.090 1.777 0.076∗∗ 3.157 0.076∗∗
Sum of investment factors 0.513 0.000∗ 0.263 0.261 0.245 0.513 11.696 0.000∗ 136.794 0.000∗
∗p < .05; ∗∗ p < .10.

153
154 H. V. Jariwala

does have a statistically significant effect on investment decision of investor.

Accordingly, following regression equation is derived:

Investment Decision = 3.118 + 0.298 (FLL)

This study confirms the effect of financial literacy level on investment

decision of investors. It acknowledges that knowledge and understanding of
basic financial concepts and the ability to use these to plan and implement
financial decisions are crucial aspects of financial literacy. As people become
more literate they become increasingly more financially sophisticated and it
is conjectured that this may also mean that an individual may be more
competent. Beal and Delpachtra (2003) argued that the financially literate
should not only possess the ability to understand the key concepts in money
management, a working knowledge of financial institutions, systems and
services and a range of analytical skills, but also possess a facilitating attitude
to effective and responsible management of financial affairs (p. 65). This
particular conceptualization of financial literacy, thus comprises a skill base
incorporating both cognitive (knowledge) and psychological (willingness
and confidence) concepts.
Table 10 summarizes the results of correlation and regression analysis
done to study the impact of financial literacy level on investment decision
of investors.

CONCLUSION

Analysis of data collected from 385 retail individual investors in the state
of Gujarat found that financial literacy level of investors does have a sta-
tistically significant impact on their investment decision. To assess this, 44
variables of investment decision were studied. To summarize these variables,
exploratory factor analysis was carried out. Out of these, 14 variables were
removed due to their low communalities. Total nine factors were extracted
from remaining 29 variables under study. To assess the impact of financial
literacy on investment decision of investors, the correlation and regression
analysis were carried out between financial literacy level (independent vari-
able) and investment decision factors (dependent variables). The regression
analysis was also performed for financial literacy level and sum of invest-
ment decision factors. Results found that financial literacy level does have
a significant effect on investment decision of investors. The findings of this
study are similar to Hussein and Al Anood Bin Kalli (2009).
This study also finds that financial literacy enhances the financial
information and financial knowledge of the investors and makes them
informed and confident in their investment decision, which leads to the
best financial management practices and improved financial behavior. The
researcher also acknowledges that financial product and services innovation
 Effect of Financial Literacy on Investment Decision 155

and marketing, technological advances, consolidation and restructuring of

the financial services industry, changes in retirement and pension plans,
and shifts in consumer attitudes are several trends that are significantly
influencing financial attitudes and decisions and hence challenge the
financial literacy of individual investors.
This study provides evidence that the investors’ ability to make invest-
ment decision largely depends on their financial literacy level, and this can be
enhanced through financial education that synergizes the tools and learning
approaches that may enhance the financial knowledge, financial behavior,
and ultimately the financial well-being of an individual. Education can play
a critical role in equipping consumers with the fundamental knowledge re-
quired to choose among the myriad of products and providers in the financial
services industry.
People need help to understand how money grows. Library may play an
important role in providing effective, unbiased financial and investor infor-
mation. Recognizing that education and awareness are powerful tools in the
fight against investment fraud, libraries should offer variety of investor educa-
tion publications like case studies, research reports, videos, CDs, PowerPoint
presentations, booklets, newsletters, and other reading resources spotlighting
investor education initiatives. It should also offer a directory of the investor
education websites of various organizations as well as financial regulators.
Not only the regulators’ offices but also the financial education providers
should join hands together with local public libraries to provide investor ed-
ucation and protection seminars to the community through the library. This
partnership to be run through public libraries across the country, seeks to
broaden access to financial education tools and assistance to consumers on
topics of personal finance. Financial literacy is a lifelong endeavor, and that
is why libraries are the perfect partners for expanding access to financial
literacy resources in the communities. Considering the complex and varied
dimensions and the plethora of opportunities that exist for the public in
the world of investment, libraries should also provide referral services to its
clients to access online journals, e-books, e-magazines, and print material
which may help its stakeholders to enhance their financial literacy.
The scope of this study is limited to identifying the impact of financial
literacy on investment decision. One can extend this study by assessing the
impact of financial literacy on saving and/or credit decisions. The study
was conducted in the state of Gujarat. One can also perform the same
study by considering other regions/states of India and/or in the countries
where the topic of financial literacy has either not yet been addressed by
the researchers or policymakers or where only preliminary work in this
regard has been done. For this study, the respondents were retail individual
investors of Gujarat State. There is enough opportunity to approach high net
worth investors (HNIs) to assess the test whether financial literacy level does
have any significant impact on investment decision of HNIs.
156 H. V. Jariwala

NOTES

1. Retail individual investor means an investor who applies or bids for specified securities for a
value of not more than two lakhs rupees. This definition is given in SEBI (2012, p. 4).
2. See OECD (2005, pp. 43–44). In the 2005 ANZ survey of financial literacy, 67% of respondents
said that they understood the principle of compound interest, but only 28% were rated with a “good
level” of comprehension when they solved an actual problem.

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