GRADUATE RESEARCH PROJECT PROPOSAL ON

Effect OF FINANCIAL LITERACY ON INVESTMENT

DECISIONS AMONG YOUNG ADULTS

By

Jenish Shrestha

LUC Registration No: LC00015002132

A Graduate Research Report Proposal submitted in partial fulfillment of the

requirement for the degree of

MASTERS OF BUSINESS ADMINISTRATION

At the

Lincoln International College of Management and IT

Lincoln University College

Faculty of Business and Accountancy

Kathmandu, Nepal

December, 2023
Table of Contents

CHAPTER I INTRODUCTION......................................................................................................3
1.1 Background of the Problem........................................................................................................3
1.2 Problem Statement.....................................................................................................................4
1.3 Purpose of the study...................................................................................................................4
1.4 Research questions.....................................................................................................................5
1.5 Research Hypothesis..................................................................................................................5
1.6 Rationale of the study.................................................................................................................5
1.7 Definition of variable.................................................................................................................6
Litrature review................................................................................................................................6
2.1Review of article.........................................................................................................................6
2.2 Conceptual Framework..............................................................................................................8
RESEARCH DESIGN AND METHODOLOGY..........................................................................10
3.1.Research Methodology.............................................................................................................10
3.2.Research Design.......................................................................................................................10
3.3.Sampling Technique.................................................................................................................10
3.4.Nature and Source of Data.......................................................................................................11
3.5. Research Framework...............................................................................................................11
3.6.Method of Analysis..................................................................................................................11
3.6.1. Data Analysis.......................................................................................................................11
References......................................................................................................................................13
 CHAPTER I INTRODUCTION

1.1 Background of the Problem

In the course of everyday life, people make a variety of financial decisions about saving,
investing and borrowing. The global marketplace is increasingly risky and is becoming
more vulnerable day by day. One of its main implications include rising costs of goods
and services that push people to be able to make well-informed financial decisions
(Lusardi & Mitchell, 2011). This phenomenon requires individuals to be equipped with
some knowledge and skills relating to personal financing, or simply financial literacy.
Financial literacy can have important implications for financial behavior. For instance,
people with low financial literacy are more likely to have problems with debt (Lusardi &
Turfano, 2009), less likely to participate in the stock market (Rooij et al., 2007), less
likely to choose mutual funds with lower fees, less likely to accumulate and manage
wealth effectively and less likely to plan for retirement (Lusardi & Mitchell, 2006). In
recent times, concern for the levels of financial literacy in society as a whole has grown
considerably and is expected to grow even more important in the future (Fox et al., 2005).

According to Mahdzan and Tabiani (2013), increasing financial literacy and capability
promotes better financial decision-making, thus, enabling better planning and
management of life events such as education, housing purchase, or retirement. It is also
more likely that young adults are experiencing more challenges with finances as they pay
bills, use credit cards, working, saving, budgeting monthly expenses, and manage debt.
Thus, there is paramount importance of financial literacy among young adults.

The awareness of the importance of financial education is gaining momentum among

policy makers across the world’s economies. Again, helping young people by understand
their financial issues is quite important, as younger generations are likely to face ever
increasingly complex financial products and services. They are also more likely to bear
more financial risks in adulthood than their parents, especially in saving, planning for
retirement and covering their healthcare needs (OECD, 2011). The need of financial
literacy has become increasingly significant with the deregulation of financial markets
and the easier access to credit, the ready issue of credit cards and the rapid growth in
marketing financial products. Recognizing the importance of financial literacy, a growing
number of countries have developed and implemented national strategies for financial
education in order to improve the financial literacy of their populations in general, often
with a particular focus on younger generations (Thapa, B. S., & Nepal, S. R., 2015)

1.2 Problem Statement

In Nepal, the concept of financial literacy is gaining traction against the backdrop of an
expanding domestic financial market and the increasing availability of diverse financial
products. However, there remains a substantial gap in the comprehensive understanding
of how financial literacy specifically impacts the investing behaviors of Nepalese
citizens. Research indicates that a significant portion of the population lacks the financial
knowledge necessary to make informed investment decisions, which could potentially
hinder their ability to effectively participate in and benefit from the financial markets.
This deficit is particularly concerning given the growing complexity of investment
opportunities and the risks associated with them. Despite the critical importance of these
issues, detailed studies focusing on the correlation between financial literacy and
investment decisions within the Nepalese context are sparse. This lack of focused
research impedes the ability to design and implement educational programs and policy
initiatives tailored to enhance financial literacy and promote healthier investment
practices among the general populace. This study aims to fill this research void by
examining how financial literacy levels among Nepalese individuals influence their
investment choices and behaviors, providing insights that could guide future educational
strategies and economic policies.

1.3 Purpose of the study

The general objective of this study is to assess the state of financial literacy among young
adults in Nepal and its implications on their financial behaviors, focusing primarily on
investment decisions.
1. To Evaluate the Level of Financial Literacy Among Young Adults in Nepal
2. To Assess Financial Attitudes of Young Adults Towards investment
 3. To Correlate Financial Knowledge with Investment Intentions Among Young
Adults

4. To Investigate the Impact of Financial Literacy on Actual Investment Behaviors

1.4 Research questions

The purpose of this study is to examine the impact of financial literacy on investing
behavior among young adults in Nepal. To achieve the research objectives and develop a
deeper understanding of the topic, the researchers formulated several research questions
based on their research goals and review of existing literature. This research aims to
address the following inquiries

1. What is the current level of financial literacy among young adults in Nepal?
2. How does financial literacy influence young adults' attitudes towards investing?
3. Is there a correlation between financial literacy and the intention to invest among
young adults in Nepal?
4. How does financial literacy impact the actual investment behaviors of young
adults in Nepal?

1.5 Research Hypothesis

The objective of this study is to explore whether a correlation exists between financial
literacy and financial behaviors in young adults of nepal.

H1: There is a significant relationship between financial literacy and investment

knowledge.

H2: Financial literacy significantly influences young adults' attitudes towards investing in
Nepal.

H3: Higher levels of financial literacy are significantly correlated with a greater intention
to invest.

H4: Financial literacy significantly impacts the actual investment behaviors of young
adults.

1.6 Rationale of the study

Financial literacy is fundamental to making informed and effective personal financial
decisions. For young adults, who are often at the commencement of their financial
independence, the ability to understand and effectively manage financial resources
becomes critical. In Nepal, where economic transitions and a growing emphasis on
personal financial management are evident, the impact of financial literacy on investment
decisions among young adults requires thorough investigation.

It is generally recognized that enhanced financial literacy equips individuals with the
knowledge to assess investment risks and opportunities, leading to more secure and
profitable financial outcomes. However, without adequate financial education, young
adults in Nepal may make investment choices that are not aligned with their long-term
financial goals, potentially hindering their economic stability and growth. Therefore,
understanding the specific elements of financial literacy that influence investment
decisions is crucial.

This research aims to bridge the gap in knowledge regarding how financial literacy
affects the investment behavior of young adults in Nepal. By focusing on this
demographic, the study will provide insights into the current state of financial education
and its practical implications on personal investing. Furthermore, this investigation will
offer valuable data to policymakers and educational institutions, prompting the
development of targeted financial literacy programs that cater to the needs of young
Nepalese adults. These programs could play a significant role in shaping a financially
adept society, thereby enhancing the overall economic well-being of the country.

1.7 Definition of variable

A variable is any quality, feature, amount, or number that changes over time or can
have varied values depending on the circumstances (as contrast to constants, like n,
which remain the same). Based on the primary premise utilized to conduct this
investigation, the study describes and identifies the many independent and dependent
variables used in the study.

1.7.1. Dependent Variable

Investment decision
 An investment decision refers to the choices made by investors or fund managers
related to the purchase, holding, or sale of financial securities or other investment
assets. These decisions are based on various factors aiming to maximize returns,
minimize risk, and achieve specific financial goals over a certain period..

Chaulagain (2017) identifies three categories of variables that influence the financial
literacy of college students. These are: (1) Demographic characteristics, which include
age and income; (2) Educational characteristics, covering the stream of education,
type of college, and university affiliation; (3) Personality characteristics, such as
attitudes towards savings and overall financial behavior.

1.7.2. Independent Variable

1. Financial Knowledge

Financial knowledge encompasses an individual's understanding of various financial

principles, products, and practices. It includes familiarity with concepts such as
budgeting, investing, credit management, and financial planning. Well-informed
individuals are expected to make more prudent financial decisions, affecting their
ability to manage personal finances, investment strategies, and long-term financial
planning effectively. Financial knowledge is critical in enhancing an individual’s
confidence in engaging with financial markets and making decisions that align with
their financial goals.

2. Financial Attitude

Financial attitude refers to an individual’s beliefs and perspectives regarding money

management, which profoundly influence financial decision-making processes. This
can include attitudes towards saving, debt, investment risk, and expenditure. A
positive financial attitude, characterized by prudence, long-term planning, and a risk-
aware approach, can lead to more secure and beneficial financial outcomes. In
contrast, a more reckless or indifferent financial attitude might result in poor financial
choices, leading to instability and potential financial distress.
3. Investment Intention

Investment intention is the predisposition or plan to engage in investment activities,

reflecting an individual's likelihood to invest in various financial instruments such as
stocks, bonds, or real estate. This variable gauges the readiness and willingness to
invest, influenced by factors such as financial knowledge, risk tolerance, and
economic conditions. High investment intentions suggest a proactive approach to
capital growth and wealth accumulation, often driven by goals such as retirement
planning or wealth diversification.

4. Investment Behavior

Investment behavior involves the actual actions taken by individuals in terms of their
investments, including choices about where, when, and how much to invest. This
behavior can range from conservative, such as investing in low-risk bonds and savings
accounts, to aggressive, such as trading in volatile stock markets or cryptocurrencies.
Investment behavior is a manifestation of an individual’s investment intention,
knowledge, and attitude, combined with external factors like market conditions and
economic indicators. It is crucial in determining the effectiveness of an individual’s
investment strategy and their overall financial health.
 Literature review
2.1Review of article
The Theory of Planned Behaviour (TPB) introduced by Icek Ajzen in 1985 is an
advanced model of the Theory of Reasoned Action (Ajzen 1985). This theory is used to
predict, explain, and understand human behaviour. Based on this theory, individual desire
is a major factor in determining a person's behaviour because there lies a motivation that
motivates the individual to strive and put seriousness in achieving and performing an
action (Ajzen 1991). Ajzen (1991) stated that the desire to perform an action is due to the
three determining factors:

1. Attitude towards behaviour: Individual assessment of behaviour in terms of whether it

is a positive or negative assessment. Ahlam Mohd Kamel, Sheerad Sahid 1213

2. Subjective norms: Social factors that can pressure and influence individuals in terms of
whether they want to do or not do a behaviour.

3. Perceived behavioural control: Individual perception of behaviour in terms of whether

it is difficult or easy to implement and individual perception of the obstacles or
challenges that exist in realizing the behaviour based on past experience.

Lajuni et al. (2018) in their study used the Theory of Planned Behaviour (TPB) to
examine financial literacy and financial behaviour. Financial attitudes and literacy were
seen to influence the desire to make changes in financial behaviour among undergraduate
students in Malaysia; however, this study is unable to support the theory that subjective
norms and perceived behavioural control can influence the desire of individuals to put an
action (Lajuni et al. 2018). Although the findings may not fully support the theory,
Lajuni et al. (2018) stressed that the use of the Theory of Planned Behaviour has a great
potential in determining the desire of individuals to perform a financial-related action. In
fact, the researchers stated that financial literacy is an important element as an extension
of the Theory of Planned Behaviour.
Satsios & Hadjidakis (2018) successfully supported the Theory of Planned Behaviour
(TPB) by proving that the attitudes towards behaviour, subjective norms, and perceived
behavioural control have a direct positive effect on the desire and behaviour of saving
money. The study found that a high positive attitude leads to a greater desire to make
savings, thus supporting the TPB where attitudes are the determinant of money-saving
behaviour. Subjective norms are also the main determinant of desire in performing an
action; individuals influenced by the beliefs and thoughts of the surrounding situation
were seen to have a desire to make financial savings and express it through behaviour
(Satsios & Hadjidakis 2018).

Raut, Das and Kumar (2018) conducted the research among the Indian investor to
examine the Investors Intention to participate in the Stock market using the Theory of
Planned Behaviour and concluded that the attitude plays a significant impact in
individuals’ behavioural intention. Similarly, Akhtar and Das (2019) also concluded that
the attitude has a significant impact on the investment intention and further adds that, in
contrast to the other elements of the Theory of Planned Behavior, attitude has the greatest
influence on investment intention. Further Raut (2020) also reported that the attitude has
the significant and the most influencing factor among other variables of the Theory of
Planned behaviour in the investment intention.

Financial attitudes have a significant positive impact on the financial literacy of

university students; hence, the higher the financial attitudes shown, the higher the
financial literacy score of the students (Albeerdy & Gharleghi 2015). Rai, Dua, & Yadav
(2017) found that the financial attitudes of women involved in employment in both the
private sector and the government are very closely related to the level of financial
literacy. According to Aydin & Selcuk (2018), the development of programs that is
specially designed to enhance financial knowledge and inculcate financial attitudes by
policymakers and educational institutions are able to form individual skills to manage
finances while improving individual financial attitudes through participation in programs,
financial seminars, and financial related basic courses.

In the Nepalese perspective Karmacharya et. al (2022) have conducted research among
the 350 Nepalese investor with the variables Heuristics variable, Prospect variables,
Market variables and herding variable and the Investment performance and reported that
the When making an investment decision, Nepalese investors rely more on market-
related considerations. Further adds that the Nepalese investors heavily depends on the
other advice and suggestion while making the investment decision without making the
proper market analysis.

Shrestha (2020) reported that the Nepalese investor investment decision are influenced by
the Company related variables. Shrestha (2020) conducted the study with the 110
Nepalese investor from the Surkhet valley where the data was collected using the
structured questionnaire. Shrestha (2020) reported that Nepalese investor prefer to buy
stocks from primary market and found that the Nepalese investor use information that are
available in the electronic media and found that the decisions are heavily influenced by
the family and the friends. Further, it is found that when deciding whether to invest,
Nepalese investors take the company's financial performance into account. Hence, the
study concluded that the Nepalese investors evaluate potential investments by looking at
factors linked to the company, such as the management team, financial performance,
historical return, company risk, and liquid securities. Nepalese investors decision is
influenced more by the company related variables than the market related variable and
risk and return related variables.

Similar to the Shrestha (2020) the study conducted by the Dangol and Manandhar (2020)
also concluded that the Nepalese investor rely heavily on the easily available information
to make the investment decision making and Nepalese investors are found to heavily
depend on the information provided to them by their close people and it is found that the
individual investing decision is guided by the suggestion and information provided to
them by the person close to them without any further analysis on the information
received. Further 21 Dangol and Manandhar (2020) adds that the investor feels that they
have access to every piece of data that are needed to make the good investment decision
and investors thinks that they have ability to make the correct investment decision with
their own skills and competency and further adds that individuals with high degree of
locus of control attributes the result of positive outcome from investing decision to their
own’s ability.
Dangol and Shakya (2017) found that the financial literacy level influences the individual
investment preference, objective, preference, advice sources and the investment horizon.
The study was conducted among the 314 investors in Nepal and concluded that the
financially literate people prefer to invest in the risky investment with the assumption
that high risk will generate the high return. Similarly, it was discovered that those with
high levels of financial literacy favor capital growth, which is regarded as one of the
most important elements in determining investment decisions. Further, it was reported
that the higher financially literate people involve in self-analysis whereas the low
financially literate people rely on the family and friends for the investment and reported
that the financially literate individual looks for the longer investment horizon in
comparison to low financially literate individual.

Similarly, the study was conducted by the Sharma, Chalise and Dangol (2017) to
examine the impact of the demographic characteristic in the risk tolerance of the
individual investor. From the study it was concluded that the Nepalese men are more
risk-seeker in comparison to the women. Similarly, it was reported that the educated
investor takes more risk. Further it was noted that the age and the wealth position of the
investor have the significant impact on the risk tolerance of the individual investor.
Individual with higher wealth position is found taking higher risk in comparison to
individual with low level of wealth. On the contradiction to the Sharma, Chalise and
Dangol (2017) the study conducted by the Karki and Kafle (2020) shows the investor's
risk-taking behavior and education do not significantly correlate. The finding of Karki
and Kafle (2020) that the financial literacy has the significant impact on the risk level
was in line with the finding of Sharma, Chalise and Dangol (2017). The study further
adds that the prior profit and loss experience of the investor have the significant impact
on the risk level.

Vaidya (2021) examined the investment decision making process of the Nepalese
individual investors and concluded that Nepalese investor make investment decision
based on the fundamentals of the company that regularly provide the information related
to the company’s fundamentals and further concluded that the Nepalese investor first
choice for the investment 22 is the Bank and Financial institutions and the insurance
company as they regularly disseminate the information regarding the fundamental of the
company. Further it is found that for short-term trading on the market, investors were
found to be relying on market trends or technical analysis in addition to the company's
fundamentals. These investors believe that insider trading and Nepal's unstable political
climate provide the country with its biggest challenges

Similar to the Vaidya (2021); Pandey, Risal and Chauhan (2020) also conducted a study
on how individual investors make investment decisions, using a sample of active
investors from the Kathmandu valley. The finding suggested that the self-image/ firm
image co-incident have the high positive correlation with investment decision. Similarly,
accounting information, advocate recommendation, personal financial need was
moderately correlated with the investment decision and the neutral information was
found to have positive correlation with the investment decision making. According to
Study of Pandey, Risal and Chauhan (2020) the psychology of the Nepalese investor
when making investment decisions in the stock market is significantly influenced by self-
image and corporate image coincidence, accounting knowledge, advocate suggestion, and
personal financial necessity. It is also noted that the factors such as reputation, goodwill
of the company, market analysis, word of mouth also have the significant impact on the
investment decision making of individual investors

2.2 Conceptual Framework

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