Demographic variables and Risk Tolerance: A Theoretical Study of

Financial Literacy in India

SUBMITTED TO:
Dr. Pallavi Rallan Faculty, Management, ASMSOC, NMIMS
Deemed to be University

Subject: Research Methodology

Buddy Group: 01
Bansi Doshi (C010)
Riddhi Badgamia (C039)
Srinidhi Anand (C044)
Stuti Shah (C045)
Svara Gangar (C048)
 Table of Contents
Sr no. Topic Page no.
Abstract 3
1. Introduction 3
2. Literature Review 4-5
3. Research Problem 5
4. Research Objective 5
5. Hypothesis 5-6
6. Research Methodology 6
6.1 Research Design 6
6.2 Data collection method 6
6.3 Sampling plan 6
6.4 Data analysis 6
7. Findings 6-13
8. Conclusion and recommendations 13
9. Limitations 14
References 14-15
Appendix 15

2
Abstract:
This study examines the impact of demographic variables and financial risk tolerance on
individual investment decisions. Demographics, including age, gender, and occupation,
alongside personal financial risk tolerance, are pivotal factors shaping financial decision-making
processes. Despite their significance, limited research has explored their influence on investment
patterns. The research highlights the importance of financial literacy in navigating complex
financial systems and making informed choices. Findings indicate gender as the primary
demographic variable significantly impacting investment patterns, with age and occupation
influencing risk tolerance and individuals' risk perception. However, despite collaborative efforts
to enhance financial literacy, India's rates remain low compared to neighboring countries.
Recommendations include integrating financial education into school curriculum and increasing
awareness of financial literacy initiatives. This research contributes to understanding investment
behavior and emphasizes the critical role of financial literacy in promoting sound financial
decision-making.
Keywords: Demographic variables, risk tolerance, Financial Literacy, National Centre for
Financial Education, Financial Education

1. Introduction:
The study is about exploring into the role of demographics in financial investment decisions by
individuals and their financial risk tolerance. There are various factors which effect the financial
decision making of an individual of which demographic variables like age, gender and
occupation and personal financial risk tolerance are the most important one. Risk tolerance is a
crucial factor that influences a wide range of financial decisions (Roszkowski and Snelbecker,
1990). Risk tolerance is defined as individuals willingness to engage in a financial activity whose
outcome is uncertain (Duda et al., 2010). Risk tolerance is the willingness to engage in behaviour
where there is a desirable goal but attainment of goal is uncertain and accompanied by
probability of loss (Kogan and Michael, 1964).
There is a little research done to examine the impact of demographics like age, gender
occupation on investment pattern and decision making process and the role of risk tolerance.
In recent years, knowing about money and finances has become more critical. This is because
financial systems are growing quickly and getting more complicated around the world. The
situations in which people make decisions about money have changed, and this change will keep
happening due to new and always-changing technology. There are many different kinds of
financial products and services available now, and they are being advertised using technology
and other ways. But it's difficult for regular people to understand all this information and make
good choices. This is why it's essential to have knowledge and skills about money, which can be
learned through financial education. Financial literacy plays a crucial role in preventing
individuals from making mistakes with their money. Moreover, it proves valuable during
emergencies, such as job loss or unexpected expenses, enabling better financial preparedness.

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2. Literature Review:
“The financial landscape has changed tremendously over the past few decades. The outburst of
the financial service industry and a variety of innovative investment avenues have transferred the
risk of investing on individuals” (Thanki, 2015). Empirical studies on financial risk tolerance of
individual investors in relation to their demographic, socioeconomic, and attitudinal factors are
limited. Some of the related studies on various determinants of financial risk tolerance
are as follows:-
Kavita Chavali (2016) investigated the impact of demographics on financial investment
decisions, focusing on factors such as age, gender, and occupation, along with individuals'
financial risk tolerance. Risk tolerance significantly influences financial decisions, and the study
employs Grable and Lytton's scale to measure it. The author’s findings reveal that gender is the
only demographic variable influencing investment patterns. The study also identifies factors
influencing investors' decisions, such as security, risk coverage, and influence from family and
friends.
Dr. Ebrahim Kunju Sulaiman (2012) explores the role in savings, investments, and portfolio
decisions, considering demographic features such as age, marital status, education,
income, and dependents. Contrary to common beliefs, the author finds no conclusive evidence
linking age to risk tolerance but identifies associations with marital status, education, income,
and dependents.
The study, conducted in the Jaffna district of Sri Lanka by Subramanium (2016), explores the
impact of demographic factors on the investment decision-making patterns of state sector
employees. The findings reveal associations between demographic factors and investment
objectives, risk tolerance, frequency, and duration of investments, providing insights for
improving the quality of investment decisions. The study of the author suggests that individuals
consider constructing a balanced and diversified investment portfolio beyond fixed deposits.
Ranjan Dasgupta’s (2015) results shows that age, marital status, education, income, savings,
future planning, investment amount, and returns impact risk tolerance. However, the study finds
women investors to be more risk-prone than males, and employment status has no
significant impact.
Sanjeet Kumar (2020) studied the risk-taking ability of women investors in the Indian stock
market, focusing on demographic factors' impact on their risk tolerance. The findings aim to
assist financial advisors and managers in understanding and addressing these demographic
variations. Emphasizing the importance of financial literacy, the study suggests it enhances
women's awareness and technical proficiency in investment decisions, contributing to the
creation of effective investment portfolios tailored to investors' needs.
Jyoti Prakash Rath and Samira Patra (2023) from Odisha, India, explored the concept of
Financial Literacy, defining it as a blend of awareness, knowledge, skills, attitude, and
behavior necessary for sound financial decisions and individual well-being. Their study focuses

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on India's current economic situation and financial literacy's importance and highlights diverse
financial services, especially from banks and insurance companies.
Data is collected from various secondary sources; The authors suggest that financial
literacy is an urgent requirement and people need to understand the benefits of financial
services provided by Government and Financial Institutions from time to time. Their message is
clear: It's not enough to be literate; one must be "Financially Literate."

Hridhya P.K. and Dr. R. Jayaprakash Reddy (2020) from Mysore University and AIMS Centre
for Advanced Research, respectively, discuss the crucial role of financial literacy in an
individual's financial well-being and a country's economic growth. They highlight that a
strong financial system contributes to a nation's development, and the government of India
has been actively working on enhancing financial inclusion and literacy among citizens.
Their paper examined the efforts made by regulatory bodies in India to improve financial
literacy and inclusion, drawing insights from research articles, newspaper articles,
regulatory documents, and books. Their study aimed to understand the significance of financial
literacy in the country and its impact on individual and national financial stability.
Dr. Neha Sharma (2015) studied financial literacy programs in India. Her paper aim to explain
the significance of financial literacy, a fundamental need for individuals worldwide. The study's
findings mention that financial literacy is important, especially in developing countries like
India. The paper evaluates government-led financial literacy initiatives, advocating for it to
become a central objective for governments worldwide to enhance financial literacy among their
citizens.

Toran Lal Verma, Dr. D. K. Nema, and Rahul Pandagre (2017) discuss the evolution and
importance of financial literacy. Their paper examined India's current financial education
level, government-initiated financial literacy programs, and their success in enhancing
financial awareness. Their study also proposed policy measures for effective scheme
implementation.

3. Research Problem:
To study the impact of demographic variables and risk tolerance on investment decisions of
individuals in Mumbai and study the concept of financial literacy in India
4. Research Objectives:
 To examine the dependence/independence of the demographic factors of the investors
and his/her financial risk tolerance.
 To understand the financial literacy of India as compared to neighbouring countries.
 To summarize initiatives led by NCFE and compare the percentage of financial literacy
rates in various states of India.

5. Hypothesis:
Developing the hypotheses: The following hypotheses are formulated for the study:

 Hypothesis 1 (H0): There is no significant relationship between gender and investment

pattern.

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  Hypothesis 2 (H0): There is no significant relationship between occupation and
investment pattern.

 Hypothesis 3 (H0): There is no significant relationship between age and investment

pattern.

 Hypothesis 4 (H0): There is no significant relationship between occupation and their risk
tolerance and acceptance.

 Hypothesis 5 (H0): There is no significant relationship between age and their tolerance
and acceptance.

6. Research Methodology:
6.1 Data Collection Method
 For objective 1- For the study of impact of demographic variables on financial risk
tolerance, primary data is collected. Quantitative data is collected using a survey of
structured questionnaire using the method of online web page (google form).
 For objective 2 and 3- The research paper is based on a descriptive study. A thorough
study of the literature has been done to find out various research related to financial
literacy in India. The data was collected from authentic secondary sources such as global
reports, NCFE Reports, articles, journals, websites, and research papers.
6.2 Sampling Plan
 For objective 1- The study adopts the descriptive and cross sectional research design.
Non-probabilistic convenient sampling technique is used and the sample respondents are
regular investors. Responses are gathered using a structured questionnaire. Questionnaire
is administered in Mumbai, India. Questionnaire is administered to 827respondents and
all of them were qualified for the study.
6.3 Data Analysis
 For objective 1- The responses are collected on a 5 point Likert scale. Data analysis is
carried out using SPSS and factor analysis, Chi-square test, Kendall rank correlation tests
are adopted to analyse the data.

7. Findings:
7.1 For Objective 1-
Data analysis is done in two parts. The first part looks at the demographic variables and
investment decisions and testing of hypotheses. The second part looks at investor risk
tolerance. Factor analysis is adopted to find out the factors which influence investors’
decisions. Based on literature review and pilot study nine variables are identified which
relates to investors decision making. Table 1 shows the factors comprising of nine variables
taken from literature available.

Table 2 exhibits the rotated component matrix. Principal component analysis is used and
varimax rotation method is adopted. The variables with the highest factor loadings (at least
above >0.05) under the respective factors or components are derived from the rotated
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 component matrix. Investor security which has three variables like family needs, safety and
security and investing in risk free assets are highly loaded and are the factors influencing
investment decision.

Table 1: Factors influencing investment decisions

Components or factors of Variables of investment decision
investment decision

Investor security 1. I invest to live a safe and secure life

2. I invest only in those assets that are risk free
3. I invest to meet my family needs in future
Risk Coverage 1. I invest to take advantage of tax benefits
2. Risk coverage is reason for investment
3. I invest to save for my retirement
Future Planning 1. I prefer long term investments over short term
investments
2. I save to meet future social obligations

Table 2: Factor analysis to understand the factors influencing investment pattern

Rotated Component Matrix
Components
Factors influencing investment pattern 1 2 3

I invest to meet my family needs in future 0.783 0.203 0.018

I invest to live a safe and secure life 0.770 0.281 0.212
I invest only in those assets that are risk free 0.721 −0.204 0.121
I invest to save for my retirement 0.458 0.513 0.126
I save to meet future social obligations 0.381 0.272 0.620
I prefer long term investments over short term 0.237 0.259 0.760
investments
I invest to receive returns like interest and 0.120 0.396 −0.685
dividend
I invest to take advantage of tax benefits 0.071 0.803 −0.111
Risk coverage is reason for investment 0.038 0.783 0.257
Extraction method: Principal component analysis.

Rotation Method: Varimax with Kaiser Normalization

The sampling adequacy is tested through KMO value (0.738) and Bartlett’s test shows the
statistical significance of the factor analysis. The total percentage of variance is 63.634% which
is higher than the acceptable range (above 60%).

Table 3: The most preferred investment option

frequency percentage cumulative

Investment options percentage
Deposit it in bank account 17 2.06% 2.06%

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 bonds 12 1.45% 3.51%
mutual fund 221 26.72% 30.23%
commodities 6 0.73% 30.96%
stock market 571 69.04% 100.00%
Total 827 100.00%

Table 3 reveals that stock market is the most preferred investment option as it does offer some
attractive advantages that make it popular for many investors. Here are some reasons why:

 High Potential Returns: Historically, the stock market has delivered higher returns than
other investments like savings accounts or bonds. This is because you are essentially
buying ownership in a company, and if the company does well, its stock price goes up,
and you can potentially sell your shares for a profit.
 Protection against Inflation: Over time, inflation erodes the purchasing power of your
money. Stocks have the potential to grow at a rate that outpaces inflation, so your
investment retains its value.
 Passive Income: Many companies share a portion of their profits with shareholders
through dividends. This provides investors with a regular stream of income.
 Liquidity: Stocks are liquid, meaning you can easily buy and sell them on a stock
exchange. This allows you to access your money if you need it.

Hypothesis 1
(H0)= There is no significant relationship between gender and investment pattern
(H1)= There is significant relationship between gender and investment pattern

According to the Chi-square test carried out it rejects null hypothesis and concludes that there is
significant relationship between gender and investment pattern i.e. investing in stock market. As
per the data collected 74.27% of the total males have opted to invest in stock market whereas
43.17% of the total females have opted to invest in stock market.
Hypothesis 2
(H0): There is no significant relationship between occupation and investment pattern.

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(H0): There is significant relationship between occupation and investment pattern.

According to the Chi-square test carried out it rejects null hypothesis and concludes that there is
significant relationship between occupation and investment pattern i.e. investing in stock market.
As per the data collected 70.18% people who are full-time employed invest in stock market, 72%
who are self-employed invest in stock market and 32% homemakers invest in stock market.
Hypothesis 3
(H0): There is no significant relationship between age and investment pattern.
(H1): There is significant relationship between age and investment pattern.

The Chi-square value is 0.836, which is more than 0.05. Therefore, we accept the null
hypothesis. Hence, we conclude that there is no significant relationship between age and the
most preferred investment option.
Hypothesis 4
(H0): There is no significant relationship between occupation and their risk tolerance.
(H1): There is significant relationship between occupation and their risk tolerance.

9
In the study majority of the respondents are cautious and have moderate risk tolerance across
occupations. In the sample, 45% of the respondents working in private companies are willing to
accept risk. The study indicates that 63% of the homemakers are risk avoiders. Gender also plays
an important role here. Businessmen are equally balanced lot with equal percentage of
respondents as gamblers, willing to take risk and percentage of avoiders. To prove the above
hypothesis, Chi-square test is performed between occupation and risk tolerance. The Chi-square
value is 0.000, which is <0.05. So we reject the null hypothesis. Hence, we conclude that there is
a significant relationship between occupation and their risk taking abilities and willingness.

Hypothesis 5
(H0): There is no significant relationship between Age and their Risk tolerance.
(H1): There is significant relationship between Age and their Risk tolerance.

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In the age group of 18-30 years, 43.5% of the respondents are risk tolerant and 3% are real
gamblers who are willing to take lots of risk. Only 13% of the respondents are real risk avoiders.
In 31-40, 41-50 and 51-60 age groups majority of them are cautious. Above 60 years majority of
investors are risk avoiders. It is evident that age is inversely related to risk tolerance of the
investor. Chi-square test is conducted between age of the respondents and risk tolerance. The
Chi-square value is 0.033. This is <0.05. So we reject the null hypothesis. Hence we conclude
that there is a significant relationship between age and risk tolerance.

7.2 For Objective 2-

Financial literacy in India as compared to the neighbouring nations.
The study entitled "Financial Literacy across the World: Insights from the S&P Global Fin Lit
Survey" furnished extensive data concerning the financial literacy landscape, encompassing a
sample size exceeding 150,000 individuals serving as national representatives from over 140
economies. The investigation transpired throughout the 2014 calendar year. The resultant report
meticulously delineated financial literacy statistics on a country basis, offering a comprehensive
view of the analyzed nations. In the graphical representation shown under, particular emphasis
was placed on the neighbouring nations to India, in alignment with the website outlined by the
Ministry of External Affairs. (Maldives excluded as No data available)
The financial literacy scores mentioned below for the neighbouring countries of India exhibit a
range of understanding in financial matters. Bhutan and Myanmar stand out with a high score,
indicating effective financial education efforts. Afghanistan, Bangladesh, and Nepal have lower
scores, suggesting a need for increased financial education initiatives. The moderate scores of
China, India, Pakistan, and Sri Lanka reflect varying degrees of financial literacy, with potential
for improvements. Overall, these scores highlight opportunities for targeted education and
awareness campaigns to promote better financial decision-making across the region.

Source: Financial Literacy across the World: Insights from the S&P Global Fin Lit Survey

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7.3 For Objective 3-
Financial literacy in india:
 Establishment of NCFE:
In the Indian context, the year 2013 marked a significant milestone with the formation of the
National Centre for Financial Education (NCFE). This establishment was made possible through
a collaborative effort involving prominent financial sector regulators: the Reserve Bank of India
(RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and
Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development
Authority (PFRDA). The primary purpose of this collaborative initiative was to effectively
implement the National Strategy for Financial Education (NSFE). The National Centre for
Financial Education (NCFE) has introduced an e-learning program focused on fundamental
financial education. This comprehensive course encompasses areas such as Banking, Securities
Markets, Insurance, and Pension products. The curriculum is divided into 20 distinct modules,
including subjects like Money and transactions, Financial Records and Contracts, Managing
Income and expenditure, long-term planning, Financial Safety Nets and insurance, and
Awareness about Scams and frauds. The e-Learning Course is available at no cost to all
registered users, aiming to provide accessible and valuable financial education.
 The initiatives led by the National Centre for Financial Education (NCFE)
1) MSSP (Money Smart School Program): The NCFE has started a program in schools to teach
unbiased financial education. This helps students (from class 6 to 10) develop an essential life
skill – understanding money.
2) FETP (Financial Education Training Programme): This initiative is for school teachers
enabling them to become “Money Smart Teachers”, who are teaching students in classes 6 to 10
across India.
3) FACT (Financial Awareness and Consumer Training): This initiative is for graduate and
postgraduate students to provide financial education for a positive impact on their financial well-
being.
4) FEPA (Financial Education Programme for Adults): This Initiative is for the adult population
of India to create financial awareness among them. The purpose of this program is to increase
financial literacy among the adult population, particularly among farmers, women's groups, Asha
workers, Anganwadi workers, self-help groups, and employees of organizations.
5) Other Initiatives: NCFE has also designed an e-learning course on basic financial education.
This course is offered free of cost to registered users. The content of the course is derived from
the book "Capacity Building for Financial Literacy Programmes (CABFLIP)," which draws
primarily from the Core Competencies on Financial Literacy outlined in the OECD-INFE
(International Network on Financial Education) document. Furthermore, NCFE provides
resources free of cost, including the Financial Education Handbook, Target Group Booklets,
Financial Literacy Booklets, Handbook on Digital Finance for Rural India, and Information on
Digital Payments. Some of the booklets and messages are also available in vernacular languages,
facilitating better conceptual understanding.

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6) NCFE Report: As per the Executive Summary of the NCFE Financial Literacy and Inclusion
Survey 2019, the overall financial literacy level in India is measured at 27%. As per the survey
Gujarat has a financial literacy rate of 34%, which means that around one-third of the population
in the state understands financial matters. Among the 35 states and union territories, about 19
(which is 54%) have financial literacy rates higher than the national average. Notably, the top-
performing regions include Goa, Chandigarh, and Delhi, where more than 50% of the population
understands financial concepts. However, at the lower end of the financial literacy scale are
states like Odisha, Sikkim, and Chhattisgarh, with only 11%, 10%, and 9% of their populations
respectively having a good understanding of financial matters. This emphasise the importance of
improving financial literacy across the nation to ensure that people are better equipped to manage
their finances effectively.

Source: Executive Summary: NCFE Financial Literacy and Inclusion Survey 2019
8. Conclusion and Recommendations:
 Understanding investment patterns and financial decision making has always been of
great interest to researchers and financial service providers and planners. Investment
pattern of individuals and investment decisions are influenced by demographic variables
and risk tolerance. The study explores into these aspects and measures risk tolerance by
using Grable and Lytton scale. The significant finding of the study is gender is the only
demographic variable which has an impact on investment patterns. Chi-square test proves
that age and occupation of the respondent has an impact on the risk tolerance and
respondents perception of risk.
 The study reveals that various prominent financial sector regulators make collaborative
efforts through various initiatives to enhance financial literacy in India. But despite all
these efforts financial literacy in India is very low compared to its neighbouring
13
 Countries. It is required to include financial education in schools’ curricula so that from
childhood at the primary school level students can understand financial literacy concepts.
 It's crucial to increase awareness about the initiatives led by the National Centre for
Financial Education (NCFE) among various groups, including school students, teachers,
undergraduates, postgraduates, farmers, women's groups, workers, self-help groups, and
employees. The promotion of NCFE's E-learning program should be extended to higher
education students and the broader online community in India. This way, a wider
audience can benefit from these resources and enhance their financial literacy.
 An essential step is to compare states with high financial literacy levels to those with low
levels. By identifying the factors contributing to high financial literacy, we can apply
these strategies in states with lower rates. This approach aims to uplift financial literacy
levels across regions and promote better financial understanding and management.

9. Limitations:
 The findings might not be true for entire population
 There might be selection bias
 The study is limited to the objectives studied in the research

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Appendix 1

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