INTRODUCTION

1. INTRODUCTION

1.1 Background of the Research

The development and expansion of any country is very much depending on the
economic condition of that country. For stimulating the process of economic
development, proper capital formation is required. The financial market plays a
pivotal role in accelerating capital formation through accumulating savings and
employing investment options and thus helps in speeding up the process of wealth
creation.

Being a developing country, India also requires capital formation at a fast

pace. This could only be achieved by promoting proper planning and channelising the
investment pattern among the people. The Indian economy has grown at a faster pace
from last decade, but the development of the economy only will not fulfil the
objective, the living standard of citizens should be improved Singh (2008) has argued
that development cannot be measured only in terms of growth, instead the objective
must be to achieve the improvement in the standard living of people.

Financial planning is a solution which converts our goals into action and helps
in determining the short and long term financial goals and provides direction to
achieve these goals. With the help of financial planning, one can have worry-free
retirement, the best education for their children and can buy a house or a car. The
importance of financial planning cannot be overstated because of two reasons mainly
inflation and changing lifestyles. With higher disposable incomes, it is common for
individuals to upgrade their standard of living. For example, earlier cars were
considered as luxuries but are a necessity today. Financial planning helps individuals
in both maintaining and upgrading their lifestyle. The individual's ability to manage
 Introduction

the monetary resources efficiently will help them to accomplish their financial well-
being which ultimately will improve their satisfaction towards life (Hira et al, 1989).

Ahuwalia (2008) argued that Indians are poor investors, though they are
prudent savers. They do not do long term planning and do not invest their money in
long term investment instruments. Further argued that Indian prefers to save their
money in homes instead of saving in banks or making investments. This will create a
serious problem for India, where there is non-existent of social security.

Life of every human being is full of risk and uncertainties therefore, it

becomes very important or rather we can say, it became a necessity to save money for
the future. But just saving money & keeping it idle is not enough, because, with time
the value of money gets depreciated. Therefore the saved money must be invested in
such a manner so that its value will get increased. Through liberalisation, privatisation
and globalisation Indian financial market has a plethora of financial products either as
a saving or investment alternatives. The complexities of the financial market has
increased since varieties of new and innovative financial products are offered though
various channels.

Hence, to cope up with the inflation and to find a way to deal with the
complexities of financial markets, an individual must have basic financial literacy.
Due to the low level of financial literacy, the individuals will not able to select the
appropriate investment alternatives which fulfil their financial needs and deals with
the complexities of the market. Financial literacy helps an individual to manage their
money properly and take investment decisions. It plays a vital role in achieving the
financial well-being of an individual thus helps in the overall economic development
of the country. Beal & Delpachitra and Commonwealth Bank Foundation (2004)
stated that financial skills facilitate individuals to steer the financial world, helps them
to make wise financial decisions which ultimately avoids being misled on financial
matters.

[2]
 Introduction

Former President of India, Shri Pranab Mukherjee, on the occasion of

International Literacy Day, 2014, stated that “Financial literacy and education plays a
vital role in financial inclusion, inclusive growth and sustainable prosperity”. The
Former Finance Minister of India, Shri P. Chidambaram stated that there is a need that
financial literacy is established in an individual‟s life. He said that every individual
who is earning is a prospective saver, every saver is a prospective investor and every
investor ought to be financially literate.” Financial literacy is a valuable tool for
financial inclusion, as they both walk hand in hand. The need and importance of
financial literacy has also been acknowledged by the policy makers, bankers,
practitioners, academicians and researchers across the world.

1.2 Need for the Study

Since ages, this world has been a male-dominated, where men run the society
and women follow them. Though women are an important constituent of our society;
rather they are the basis of humankind. It is rightly said that if we made a woman
literate whole family becomes literate. In 2015, world literacy was 86.3%, among
which 82.7% of women were literate. The Indian scenario is a bit grim where among
72% literate persons, 62.8% women were literate (“Literacy Statistics Metadata
Information Table". UNESCO Institute for Statistics. September 2015).

Women, not only play an important role socially but economically too. The
economic development of a country revolves around the economic empowerment and
financial well-being of women. McKinsey Global Institute (2015) has mentioned in
their report that India can increase its GDP to 16 % if the participation of women in
the workforce is increased by 10%, by the year 2025. Thus, women have been
identified as the major economic agent in contributing to the economic growth of the
nation.

In India, in earlier times it was believed that the men were the principal
earners and women were the main spenders of the family. The status of the women
was substandard as compared to men since women were considered only as a
homemaker, whose job is to do the work of the home, take care of the family and was
gave birth to the child. They were kept under control of their parents before marriage,

[3]
 Introduction

and after marriage, control shifted from parents to husband. But now, the condition of
women is improving; they were given equal right to education as well as expression.
Now, they are holding prominent positions in almost every field being academics,
administration, judiciary etc.

But new problems have emerged now. Women are confronting various
challenges and hurdles which make it difficult for them to be financially geared up for
their future. They are constantly trying to balance work and home. Women are still
facing financial challenges throughout their life and after retirement period. On
average women live longer than men and therefore a requirement of saving is more
needed. But, they face many hurdles which prevent them to save for their retirement;
first on an average they earn less than men, secondly they work for lesser period as
compared to men because they have to take care of their children and elderly parents,
thirdly their role of caretaker for their family forces them to work part-time and their
often movement of in and out of work prevents them to qualify for the retirement
benefits. Although the majority of women say retirement is their primary investment
goal, more than 50 per cent have not invested for retirement (Hartford, 2008).

Financial literacy is important for women because nearly 90 per cent of all
women will end up managing their financial portfolios alone at some time in their life
(Oppenheimer Funds, 2005). Until and unless some tragedy such as divorce or death
of their husband does not happen in their life, they are not ready to take
responsibilities of financial matters. For them it is very difficult to separate money,
family and emotions. Moreover, they are hesitant to discuss financial issues because
they think they will be treated as uneducated or unaware and they fear that they will
not understand the process of financial dealings. Well educated and informed women
may make better financial decisions and can manage their financial portfolios.

Women are generally less concerned about their financial wellbeing and they
show less interest and eagerness and have less confidence in making financial
decisions. They give many excuses such as they don‟t have enough time, enough
money to save, their husband will do for them; have no interest in money matters etc.

[4]
 Introduction

Women often have less interest in finance and their preparation for the subject may
not be appropriate (Chen, 2002). The World Bank mentioned in one of its reports that,
with regards to involvement and participation of women in workforce India stands at
the 120th position out of the total 131 countries (Hindustan Times, 2017). Various
past studies also pointed out that women‟s contribution to the total world‟s work was
sixty per cent but earn only ten per cent of the total world‟s income.

In India, only 27% of women are in the workforce, which is the lowest among
the BRICS countries (The Business Standard, May 2017). As per the CIA World
Factbook (2015), 60% of the females are literate. The life expectancy of females is
70.1 years (2017 est.) and males are 67.6 years. The total dependency ratio is 52.2,
whereas the youth dependency ratio is 43.6, with a median age of female 28.3 years
(2016 est.). Therefore it becomes imperative that women take care of their financial
matters so that they may secure their financial stability and future. For sustainable
development of a nation, the financial wellbeing of women is must and which is very
much influenced by their financial decision-making capabilities, financial
understanding and their investment actions. This all can only be happen if they are
financial literate, therefore basic financial literacy is required.

In India, the working women have started doing investment but at a very low
pace. They generally prefer to take short term investment decisions and take their
steps back when it comes to take larger financial decisions even though when they are
working and they generally leave it to their spouses, fathers, brothers, etc, believing
them to be financial experts, hence men take the lead for making investments, buying
insurance, borrowing a home loan, etc. The percentage of working women who take
their own financial decisions for making investments is low, still there is a class of
working women who are not very much serious about investments out of their income
because these women started working with the intention of killing the time only or
they don‟t want to sit idle at home. No doubt, there is a class of working women who
are taking their own investment decisions, managing their portfolios and getting good
returns. But still, the percentage of such class of working women is a bit low.

[5]
 Introduction

During the field work, personal interview was also taken from the respondents
and it was observed that there was lack of financial awareness and knowledge,
majority of them did not have proper financial planning. Moreover, it was noticed that
women lack positive attitude toward investment decision making. When asked from
them why they were not worried about their own financial stability, they answered
why to take such pressure, their spouse will take care of family‟s financial issues, not
interested in these financial matters, don‟t have enough time to think about all these
matters. Hence change is required that means more and more working women should
be financially aware so that they should take their own financial or investment
decisions.

The present study focuses on measuring the financial literacy level among
working women in the Eastern Uttar Pradesh region. The study has also examined the
relationship between demographic profile of the respondents‟ and their level of
financial literacy and tries to find out the most preferred investment avenues among
working women. The study also attempts to examine whether the level of financial
literacy of working women does have any influence on their investment decisions or
not? Does financial knowledge, behaviour and attitude influences investment
decisions of working women or not is also examined in this study.

1.3 Growing Importance of Financial Literacy

In today‟s scenario, emerging as well as developed economies have started

giving much attention on the financial literacy of their people. For many people, the
term financial literacy sounds unfamiliar and many find it beyond their understanding.
Financial literacy puts a burden on the country in the form of a higher price of
financial security and lesser prosperity. Financial ignorance carries significant costs.
Consumers who fail to understand the concept of interest compounding spend more
on transaction fees, run into bigger debts, and pay higher interest rates on loans
(Lusardi and Tufano, 2015; Lusardi and de Bassa Scheresberg, 2013). Financially
literate people can understand the financial world and make well-informed decisions
that will help in achieving financial wellbeing. The need for financial literacy in a
country like India is because of:

[6]
 Introduction

1. Increase in Life Expectancy

Now days, the people become more conscious about their health and
improvements in health care services has increased the life expectancy in India, which
results in a longer time to spend in retirement. This will certainly increases the need of
financial planning such as savings for post-retirement, investment decisions,
expanded insurance plans and provision for unexpected future eventualities. Only
knowing the importance of financial planning is not enough, the individual must
know how they can make their financial plan in better way so that their purposes
could be achieved. For doing better financial planning one must know the basic
concepts of money management like computation of compound interest, risk
diversification etc.

2. Changes in the Family Structure

The trend of nuclear family is increasing day by day. Earlier, in a joint family
the decisions were taken by the head of the family with everyone‟s consent and
everyone being accountable for that decision. The profit earned or the loss suffered
was shared equally among all, no one was responsible for profit or loss alone. The
structure of the nuclear family increased the responsibilities of individuals in respect
of spending, saving and investment. The concept of Liberalisation, Privatisation and
Globalisation opened the greater job opportunity which increased the mobility of an
individual. For availing the better opportunities the individual starts moving from
their native places and thus get separated from their whole family. The individual
husband and wife are only responsible for their decisions and have to face the
consequences of their choice. Moreover, it becomes very essential for parents to make
a plan and do investment accordingly so that they may fulfil the necessities of their
children‟s education because of an increase in education costs. These challenges
force an Individual to be financially literate so that they can make informed and
accountable decisions.

3. Shift in Risk

The risk has been transferred from government and employer to an individual.
Now, an individual has to plan their financial security by themselves so that they can

[7]
 Introduction

secure their after retirement period and may achieve financial wellbeing. Every
financial product and services available in the financial market involves certain risk
and many times individuals are not aware of that risk because of lack of financial
literacy, thus they have to face serious financial problems. Now, an individual has to
be more conscious while doing investments, they have to manage their portfolio in
such a manner so that they may achieve lifetime financial wellbeing. Most the survey
proves that the majority of the individuals are unaware of the risks which they have to
face nowadays; they do not have skills and knowledge to deal that risks adequately,
even if they are aware of them (OECD, 2008). Therefore, having knowledge of
financial market will not fulfil the purpose alone; one must have the skill to access the
information available so that their investment must provide profitable return.

4. Innovations in Financial Products and Services

In today‟s scenario, the financial market has been providing a myriad of

financial products and services by an array of providers through different distribution
channels. Due to liberalisation and reduction in expenses with the help of financial
engineering; because of advancement in information technology, many innovative
financial products and services are being modified to meet the specific needs of the
financial market. The products available in the financial market are complex,
therefore some considerations have to be taken care of such as interest on products,
fees charged and level of risk involved in particular product etc. The available
opportunities in the financial market could be chased, only if an individual is
financially literate. One must have the skill to analyse the best option from the
available alternatives which would help in achieving financial wellbeing.

5. Digitalisation of Financial Market

The digitalisation of the financial market helps in providing financial services

to the doorstep of every individual. The development in technology makes the
functioning of financial market speedier. With the help of technological development,
nowadays almost every bank provides their services through online portals as well as
through mobile applications; thus providing ease in accessing the financial services.
But knowing all these may not serve the purpose, an individual must have the skills to

[8]
 Introduction

use these apps, skill to check their authenticity because there is always a risk of cyber
theft. National Payments Corporation of India (NPCI) release BHIM application
towards one step of achieving a cashless economy. The individuals who are
associated with the services of banking, insurance and financial markets, they must
have to be aware of the application of this technological development.

6. Deregulation of Financial Market

After Liberalisation, Privatisation and Globalisation, the economic policy of

1991 has changed the shape of the Indian financial market. The new economic policy
of 1991 has brought structural changes in the economy of India; change has been
witnessed in almost every sector. Due to liberalisation, the foreign players are started
entering into the Indian financial market very easily. Beal and Delpachitra (2003)
stated that “over the last decade the need for financial skills had increased rapidly due
to deregulation of financial market and also because of easy availability of credit from
financial institutions to hold more market share to bear competition”.

1.4 Worldwide Status of Financial Literacy

In 2014 S&P Global FinLit Survey (Standard & Poor‟s Ratings Services
Global Financial Literacy Survey) conducted a survey on financial literacy in more in
140 countries; the survey was conducted on more than 1, 50,000 adults aged 15 and
above. The financial literacy included questions on basic knowledge of fundamental
concepts in making a financial decision such as knowledge of interest rates,
compounding interest, inflation and risk diversification. The individual would be
considered financially literate if they answer correctly at least three out of the four
questions.

It was found that financial literacy significantly differs in the major advanced
and emerging economies. In the advanced economies, the percentage of financially
literate people ranges from 37 per cent in Italy to 68 per cent in Canada. On average,
55 per cent of people in the major advanced countries- Canada, France, Germany,
Italy, Japan, the United Kingdom and the United States were financially literate.
Whereas, in major emerging countries like Brazil, China, India, the Russian

[9]
 Introduction

Federation and South Africa on average 28 per cent people were financially literate.
The percentage of financially literate people in major emerging economies ranges
from 24 per cent in India to 42 per cent in South Africa. Among the emerging
economies, India has the lowest rate of financial literacy. (Fig.1)

Figure 1.1: Financial Literacy around the World

(Source: S&P Global FinLit Survey, 2014)

Further, the survey revealed that among all the four concepts (inflation,
numeracy, compound interest and diversification) inflation and numeracy is the most
understood concept among the people. Only 35 per cent of the people have the
Knowledge of risk diversification thus representing the least understood concept
among all the four concepts. In the case of risk diversification, 64 per cent of the
people in the major advanced economies have an understanding of risk
diversification. It is evident that the difference in other concepts are less marked,
ranging from 15 per cent for inflation to 10 per cent for the concept of compound
interest. (Fig. 2)

[10]
 Introduction

Figure 1.2: Financial Literacy Concepts around the World

(Source: S&P Global FinLit Survey, 2014)

In 2017 OECD/ INFE (International Network on Financial Education)

conducted an international survey in G20 countries using Financial Literacy and
Financial Inclusion Measurement Toolkit which included three components viz.
Financial Knowledge, Financial Behaviour and Financial attitude. The survey was
conducted on 101,596 adults aged 18 to 79. As per the survey, average scores across
the G20 countries that submitted sufficient data of just 12.7 out of a possible 21 (made
up of a total possible 7 points for knowledge, 9 for behaviour and 5 for attitudes).
France has an average score of 14.9, both Canada and Norway have an average score
of 14.6 and China has an average score of 14.1. The average score of Korea,
Germany, Netherlands, Indonesia and the United Kingdom are 13.9, 13.8, 13.4, 13.4
and 13.1 respectively. These countries secured above the average score of 12.7 among
all the G20 countries.

The average score of Turkey, Russian Federation, Mexico and Brazil are 12.5,
12.2, 12.1 and 12.1 respectively. India has an average score of 11.9; Argentina has an
average score of 11.4. The average score of Italy and Saudi Arabia are 11.0 and 9.6
respectively.

[11]
 Introduction

France (14.9), Norway (14.6), Canada (14.6) and China (14.1) were the only
four G20 countries achieving an above-average score. Whereas, India, Argentina,
Italy and Saudi Arabia were the countries who scored below the average score of 12.

Figure 1.3: Financial Literacy in G20 Countries

(Source: G20/OECD INFE report on adult financial literacy in G20 countries, 2017)

1.5 Financial Literacy in India

Financial inclusion and financial literacy are the two aspects of a proficient
economy which ensures financial stability in the economy. In India, financial
inclusion is one of the most prioritized segments, for which the government has made
various awareness programs and launched different schemes from time to time.
Financial inclusion talks about numbers whereas financial literacy talked about
quality. For achieving financial inclusion more emphasis is given on opening more
bank accounts at zero balance, to provide basic banking facilities to every individual
of the country. Whereas, financial literacy emphasises on increasing the knowledge of
financial matters to achieve lifetime financial wellbeing. A Financially literate person
can evaluate and compare the financial products, can make better financial decisions,
understand and manage the risks efficiently.

[12]
 Introduction

In 2007, the Reserve Bank of India had started offering free financial
education and counseling to both rural and urban populations under an initiative of
establishing Financial Literacy and Credit Counseling Centers in the country. The
RBI has started a project titled "Project Financial Literacy". Under which, information
related to the central and general banking concepts is disseminated to various target
groups such as school and college students, rural and poor people, defence personnel
and senior citizens. The project has two modules; one focusing on the economy,
functioning and activities of RBI; and another module is focused on general banking
functions. The study material is available in English, Hindi and 13 regional languages.
It has been dispersed among the target groups, banks, local government, school and
colleges through brochures, booklets, presentations through short films and bank‟s
website.

In April 2012, Visa had released the results of a survey conducted on financial
literacy among 25,500 individuals in 28 countries. It was revealed that 50.4 per cent
people of Brazil are financially literate, which is the highest among all the 28
countries. Mexico has 47.8 per cent of people who are financially literate followed by
Australia and the USA which have 46.3 per cent and 44 per cent of people who are
financially literate respectively. India was on the 23rd position with 35 per cent
financially literate people (Visa International Financial Literacy Survey, 2012).

1.6 Financial Literacy Initiatives Taken in India

Financial literacy has been recognised as most important by the government

and policymakers, therefore various initiatives have been taken for the growth and
promotion of financial literacy with the help of financial education. Ministries like
Ministry of finance, Financial Stability and Development Council, Ministry of Human
Resource and Development; financial bodies like RBI, SEBI, NABARD and IRDA
have taken numerous steps to promote financial education in India to empower people
on the personal financial matter by providing necessary concepts and skills on
financial issues. The detailed descriptions of initiatives taken by different financial
institutions are as follows-

[13]
 Introduction

1. Initiatives taken by Reserve bank of India

Financial education and financial inclusion are the two significant aspects of
the Reserve Bank of India. For achieving this objective RBI has created quantity of
literature which was uploaded on its website in 13 languages with an aim of creating
awareness regarding financial products and services, various financial practises as
well as consumer protection. The RBI has provided a booklet named as “FAME”,
(Financial Awareness Messages) which provide the basic financial literacy awareness
messages like importance of budgeting, savings borrowing and investing, documents
required while opening a bank account, how to file complaints at the bank etc. RBI
also issued a booklet called “Raju”, which provides knowledge on basic banking
concepts and inculcating a habit of savings among people. There is another booklet
issued by the RBI named as “Money Kumar”, which give details on the role and
functioning of central bank in India. The financial literacy guide provided by RBI has
covered topics like electronic fund transfer, kissan credit card, saving deposits and
fixed deposits etc.

2. Initiatives taken by Securities and Exchange Board of India

SEBI conducted many programs nationwide for promoting financial education

with the help of copious programs, campaigns, events etc. SEBI has its own panel of
resource persons throughout India, who give training on various facets of financial
matters like financial planning, savings, investment, banking, insurance, retirement
planning etc. The programs were especially focusing on school and college students,
self help groups, retired people, working class and women. It has also its website for
imparting knowledge related to financial literacy to the investors; as well as has its
toll free helpline number in 14 different languages, from where investors can seek
information for redressal of their grievances and direction on various financial issues.
SEBI has also initiated an investors association under the name “Sanchayan”, where it
organises different financial literacy programs for investors.

[14]
 Introduction

3. Initiatives taken by Insurance Regulatory and Development Authority

IRDA has conducted numerous awareness programs related to the rights and
duties of policy holders, channels for dispute redressal as well as published various
magazines and comic bank services related to insurance. IRDA published
“policyholder handbooks” for investors as well as for children too it has prepared
material. IRDA also organises seminar on a regular basis for protecting the interest of
the investors. It has its website also for creating awareness regarding consumer rights
and imparting education to investors.

4. Pension Fund Regulatory and Development Authority’s initiatives

Pension Fund Regulatory and Development Authority has disseminated the

sound security message system on its portal by through frequently asked questions
related to the pension for helping people in resolving pension related issues. It has
taken various steps to create awareness regarding pension products among people. For
providing the retirement benefits, PFRDA has initiated the National Pension Scheme;
since the life expectancy is increasing and change in family structure enlarges the
requirement of retirement planning.

5. Initiatives taken by other Banks

Apart from RBI and commercial banks, the private and multinational banks
also contributed their efforts towards financial inclusion through financial literacy. In
the erge of opening FLCCs in the country, the Bank of India initiated a programme
named as “ABHAY”; Canara Bank Mobile Van named as “Canara Gramina Vikas
Vahini”, Dena bank‟s programme called “Dena Mitra” and Allahabad bank initiated
its programme under the name “Samadhan”. The South India Bank has initiated
“KIOSK banking Model” as a financial inclusion initiative in collaboration with
Akshaya e-centres in Kerala.

6. Initiatives taken by Non- Government Organisations

Non-Government Organisations also initiated financial literacy programmes as

a part of their Self-help group development programmes. The Mangalore based

[15]
 Introduction

Institutions in collaboration with Syndicate Bank and Vijaya Bank have started a
programme named “Jnana Jyothi Financial Literacy and Credit Counselling Trust”,
“DHAN” Foundation, People‟s education and Development Organisation (PEDO),
Centre for Community Economics and Development Consultants Society
(CECOEDECON) in addition many more institutions across the country were
working on imparting financial literacy to the excluded people, specially focusing on
poor and women.

1.7 Women and Financial Literacy

India is the second most populated country in the world, where women hold
48, 5% of the total population (Socio-Economic Caste Census, 2011). As per Global
employment trends (2013), the rate of participation in the labour force has declined
from 37% in the year 2004-2005 to 28% in 2016. McKinsey Global Institute
identified women as a major agent for the economic escalation of the country.
Because the economic growth of a nation swivels around the financial wellbeing and
economic empowerment of women.

Financial literacy is being identified as an important element of improving

women‟s financial wellbeing. It is observed from the previous studies that though
women have started working at a faster pace still women are dependent largely on
their husband for financial decision making. Because of a low level of financial
literacy among women, they are not capable enough to take advantage of financial
markets thus preventing themselves to secure after retirement age and achieving
lifetime financial wellbeing.

The financial service giant VISA had surveyed 25,500 people in 27 countries
between the periods of February to April 2012. The survey revealed that Brazil is at
the top with 50.2 per cent of financially literate women, followed by Australia,
Mexico and USA which have 48.8 per cent, 47.8 per cent and 44.6 per cent
financially literate women respectively. India is on the 19 th position among all 27
countries with 36.8 per cent financially literate women. Indonesia is on the last
position with 26.4 per cent financially literate women followed by Pakistan and

[16]
 Introduction

Vietnam with 27.8 per cent and 31.9 per cent financially literate women. Further, the
survey revealed that in India 37.9% of women follow the household budget whereas
Brazil had the highest rate of 51.8%. Moreover, India ranked 13th with 31.3% women
who save for an emergency among 27 countries (Fig. 1.4).

Figure 1.4: Financial literacy among Women around the World

(Source: Visa World Financial Literacy Survey 2012)

Worldwide, 30 per cent of women are financially literate compared with 35

per cent of financially literate men. Lusardi and Mitchell (2014) stated that in
response to the financial literacy questions women are less likely to give correct
answers. They more prefer to give “don‟t know” in their answer. The other studies
also consistently observed the same thing. The gender gap in financial literacy was
found in both advanced and emerging countries.

Figure 1.5 shows the worldwide gender gap in financial literacy. It was
observed that worldwide 35 per cent of men have given three out of four correct
answers whereas only 30 per cent women have given three out of four correct
answers. Thus, representing the worldwide 5 per cent gender gap in financial literacy.
The average gender gap in financial literacy in major emerging countries is the same

[17]
 Introduction

as the worldwide gender gap i.e. 5 per cent, since 35 per cent of men gave the three
out of four correct answers in comparison to 30 per cent of women who gave three out
four correct answers.

Figure 1.5: World Wide Gender Gap in Financial Literacy

(Source: S&P Global FinLit Survey, 2014)

2. THEORETICAL FRAMEWORK

2.1 Introduction of the term Literacy

Before understanding the term financial literacy it is very important to know

about the term „literacy‟. In layman terms literacy can be defined as the ability to read
and write. In other words, the ability to understand, categorise, compute, interpret,
converse by using written resources is termed as „literacy‟. It has been defined
differently in different fields.

The ability to read and write or the ability to make use of language efficiently
is termed as literacy (Collins dictionary). The Oxford English Dictionary defines
literacy as “the state of being literate, understanding of letters, state of education and
skill of reading and writing”.

[18]
 Introduction

The first universally accepted definition of literacy was given by UNESCO

(1958) which stated that “the individual who has the understanding of both reading
and writing of short simple sentences may be treated as literate person”. The
Workforce Investment Act (1998), National Institute for Literacy defined literacy as
"an individual's capability of reading, writing, speaking in English and solving
problems in the family, at the workplace and in the society. It represents the broader
view of literacy. This definition gives a broader view of literacy and not just the
ability of read and write.

Burnet (1965) describes that literacy is not just the ability of reading and
writing but it also includes learning, achieving status and human rights, knowing and
making choices, making comparisons and creating & confirming conclusions.
Majorly focuses on the following elements-

 Learning
 Knowing
 Making Choices
 Making comparisons
 Creating and confirming conclusion

Figure 1.6: Elements of Literacy

Learning

Creating
Conclusion Knowing
s
Literacy

Making
Comparis Making
-ons Choices

(Source: Elements of Literacy, Burnet, 1965)

[19]
 Introduction

Mason and Wilson (2000) defined literacy as "the process in which

individual uses their skills in utilising available resources in order to achieve the
desired objective”.

Mason L. J & Richard M.S.W. (2007) elucidates that "literacy is a meaning-

making process which helps to make informed decisions to achieve desired
outcomes”.

2.2 Financial Literacy

2.2.1 History of Financial Literacy

The need for financial literacy was first recognised by John Adams on August
23, 1787. He wrote a letter to Thomas Jefferson in which he said that “all the
perplexities, confusions, and distresses in America arise, not from defects in their
constitution or confederation, not from a want of honour or virtue, so much as from
downright ignorance of the nature of coin, credit, and circulation.”

The following are some top historical developments that have driven the impact and
success of financial literacy throughout the world:

 The 1950s - In many countries throughout the world, the 1950s marked a time
when the issues of financial management, income and expenditure, security
and retirement, housing, budgeting and saving comprised fifty per cent of the
research that were discussed in the field of home economics. Financial literacy
continued to gain greater prominence in the field of education and beyond.

 The 1970s - In the 1970s, credit union volunteers recognized the need to
provide financial education to young people, as credit unions formed the
National Youth Involvement Board (NYIB) to focus on youth financial
literacy. NYIB is established with a mission to facilitate the credit union
industry so that they can reach to youth. It provides ideas and education
materials to boost and encourage the enthusiasm for financial literacy among
the youth worldwide.

[20]
 Introduction

 Financial Liberalization (2000) - Japan‟s Minister of Finance convened

meetings on the urgent need for financial literacy due to the rapid financial
liberalization in the country.

 Promotion of Consumer Education (2002) - Consumer education became a

major focus throughout Asia in the early 2000s. In 2002, the Guidelines of the
Promotion of Consumer Education on Finance were published by the Central
Council for Financial Services Information, Japan.

 Financial Literacy and Education Improvement Act and FACTA (2003) -

In the United States, the Financial Literacy and Education Commission was
established under the Financial Literacy and Education Improvement Act,
which was part of the Fair and Accurate Credit Transactions Act (FACTA) of
2003, to improve financial literacy and to develop a national strategy on
financial education. The United States Senate also designated April as
Financial Literacy for Youth Month.

 The Organization for Economic Co-operation and Development and

Global Financial Literacy (2003) - OECD started an inter-governmental
project in 2003 with the objective of providing ways to improve financial
education and literacy standards through the development of common
financial literacy principles.

 Ben Bernanke Promulgates the Importance of Financial Literacy (2012) -

U.S. Federal Reserve Chairman Ben Bernanke promulgated the importance of
financial literacy and said that the next generation will be better off, as greater
financial literacy would help support both individual and national economic
health.

 OECD and Russia’s G20 Presidency Issue Report on Advancing National

Strategies for Financial Education (2013) - The Organization for Economic
Co-operation and Development (OECD) and Russia‟s G20 Presidency issued

[21]
 Introduction

a report on Advancing National Strategies for Financial Education, detailing

progress by the governments of the world‟s major economies in implementing
national strategies for improving financial education.

2.2.2 Definitions of Financial Literacy

Financial literacy has been defined differently by many researchers. Different

explanations have been used in various financial literacy studies, thus has no uniform
definition. Many times financial literacy has been interchangeably used with financial
awareness, financial knowledge, financial capability etc. Some of the important
definitions of financial literacy are as under-

Jacob, Hudson and Bush (2000) state that financial knowledge is not just a
convenience but a necessary survival means.

Kim (2001) stated that “Financial literacy is a basic knowledge that people
need in order to survive in a modern society”.

ANZ Bank (2003) stated that "financial literacy enables individuals to feel
confident and take informed financial decisions regarding budgeting, saving and
spending. It also facilitates individuals to make future plan and proper use of financial
products and services as well as making investments”.

FINRA (2003) stated that "financial literacy may be defined as the

understanding of ordinary investors regarding market principles, instruments,
organizations and regulations”.

Financial literacy may be defined as "an individual's ability to make informed

judgement and to take effective decisions regarding the management and use of
money" (ASIC: 2003, Noctor, Stoney and Stradling: 1992).

Lusardi and Mitchell (2007) explained financial literacy as “understanding

about the most basic economic concepts needed to make practical saving and
investment choices”.

[22]
 Introduction

The Organization for Economic Co-operation and Development (OECD,

2005) has defined financial literacy as “a combination of awareness, knowledge, skill,
attitude and behaviour necessary to make sound financial decisions and ultimately
achieve individual wellbeing”.

The U.S. Financial Literacy and Education Commission (2006) defined

financial literacy as "the capability to take informed judgements and take effective
actions related to the current and future management and use of money”.

Mandell, L. 2008 defined financial literacy as "the ability to evaluate the new
complex financial instruments and to take informed judgements regarding choice and
extent of use of instruments which would be in their own best long-run interests”.

The President’s Advisory Council on Financial Literacy (2008) stated that

“financial education leads to improve the understanding about financial concepts,
products and services and thus give power to take well- versed choices, stay away
from serious consequences, know from where to seek help and how to take action for
improving present and future situation”.

Atkinson and Messy (2012) defined financial literacy as "combination of

awareness, knowledge, skill, behaviour and attitude which is necessary to make sound
financial decisions and to achieve individual financial wellbeing”.

Jump Start describes financial literacy as “the capability to make use of

knowledge and skill for managing financial assets in an efficient manner for attaining
financial security during lifetime”.

Reserve Bank of India, defined financial literacy as “the capacity to have

familiarity with an understanding of financial market products, especially rewards and
risks in making informed choices”.

The National Financial Educators Council defines financial literacy as

“Possessing the skills and knowledge on financial matters to confidently take

[23]
 Introduction

effective action that best fulfils an individual‟s personal, family and global
community goals.”

The Government Accountability Office (GAO) defines financial literacy

as “the capability of making informed judgments and taking effective actions
regarding the current and future use and management of money. It includes the ability
to understand financial choices, plan for the future, spend wisely, and manage the
challenges associated with life events such as a job loss, saving for retirement, or
paying for a child‟s education.”

Although the definitions given by different studies are varied but convey the
same meaning. Whichever definition is considered, the fact remains the same that
financial literacy is very important for an individual to equip with the knowledge and
skills needed to operate in the complex financial system. The definitions of financial
literacy emphasise that it provides financial security throughout life and thus helps in
achieving wellbeing to an individual throughout a lifetime.

Figure 1.7 shows the composite definition of financial literacy. In a nutshell,

financial literacy may be defined as a „set of knowledge, skills, behaviour, and
attitude necessary to make an informed judgement in the complex market thus helps
in achieving the lifetime financial wellbeing‟.

Figure 1.7: Composite Definition of Financial Literacy

Set of knowledge, skills, behaviour and

attitude

Informed judgement

Financial Wellbeing

[24]
 Introduction

2.2.3 Concept of Financial Literacy

From the above given literature review it may be said that the concept of
financial literacy has various parameters like basic money management, financial
planning and savings, investments, budget etc . Financial literacy can be understood as
the ability to know how money works in a normal course of action. In particular
financial literacy refers to the combination of knowledge and skills which allows an
individual to make informed and efficient decisions with all of their financial
resources. Financial literacy is directly related to the wellbeing of an individual and
society as a whole, since it helps an individual to manage their financial matters like
savings, investments, tax planning, retirement planning, etc. and enables them to
understand how more money can be generated and used in a more effective and
efficient manner.

Financial literacy can be understood narrowly or broadly. Natalie, Newton and

Chrisann (2010) stated that financial literacy in its narrow perspective focuses on
“basic money management tools such as saving, budgeting, insurance and investing”.
In a broader outlook, financial literacy can be defined as “understanding of economics
and how economic conditions and circumstances affect household decisions”
(Worthington, 2006). In general, the narrow view of financial literacy is considered
which influences the individual‟s financial matters.

Many times, people get confused about financial literacy with financial
awareness. But there is a difference in being financially literate and financially aware.
Financial awareness is part of financial literacy. To be financially literate one must
have to be financially aware. Financial literate people are financial aware but it is not
necessary that those who are financially aware are also financial literate. Financial
awareness may be understood as the individual‟s understanding of basic financial
terms such as balance, depreciation, budget, planning, savings etc. Individuals may be
familiar with those terms but yet not able to recognise the relevance or consequences
of these financial terms in making financial decisions. It ultimately stops them from
achieving desired results, therefore an individual should not be only financial aware
but also financial literate.

[25]
 Introduction

“Financial literacy is not an absolute state. Financial literacy refers to an

evolving state of competency.” Financial literacy is viewed as meaning making
process. It uses a combination of resources, skills and technologies and related
knowledge in making informed decision to achieve desired outcomes.

Angela A. Hung et al. (2009) in their working Paper entitled defining and
measuring financial literacy stated that the definition of financial literacy lies largely
in the ability to use the knowledge and skills to achieve financial well-being, and
therefore the required behavior adequate to the underlying. They argue that the
financial knowledge, skills, and behaviours, as well as the interrelationships among
others should be considered in the overall concept of financial literacy, as seen in the
following picture-

Figure 1.8: Conceptual Model of Financial Literacy

Financial
Knowledge

Financial Perceived
Skill Knowledge

Financial
Behaviour

(Source: Angela A. Hung, Andrew M. Parker, Joanne Yoong (2000)

Sandra J. Huston (2009) stated that “financial literacy is a measure of how

well an individual can understand and use information related to finance. Financial
literacy does not only require knowledge dimension, but also requires an additional
dimension of application that requires a person to have the ability and confidence over

[26]
 Introduction

its financial knowledge to be used in making financial decisions. Sandra J. Huston

(2009) described the concept of financial literacy as shown in the following figure.

Figure 1.9: Dimensions of Financial Literacy

Application Dimension

Ability and Confidence to effectively

apply or use knowledge related to
personal finance concepts and products

FINANCIAL
LITERACY
KNOWLEDGE
FINANCIAL

Knowledge Dimension

Stock of Knowledge acquired through

education and / or experience specifically
to essential personal concept and product

(Source: Sandra J. Houston, 2010)

2.2.4 Components of Financial Literacy

Financial literacy has three main components such as core competency,

proficiency and opportunity. These components are distinctive but are dependent on
each other. Absence of any one may create hurdle in achieving the desired level of
financial literacy. In other words, to be financially literate one must have to be
competent in all three aspects.

Figure 1.10 depicts the components of financial literacy. The first component
core competency discusses about five things- numerical ability, budgeting, savings,
borrowing and investment. Proficiency talks about financial knowledge, application
of knowledge, skills and confidence and behaviour and attitude. The third component
i.e. opportunity tells how to acquire and use competency and proficiency.

[27]
 Introduction

Figure 1.10: Components of Financial Literacy

Core
Proficiency Opportunity
Competencies

• Numerical Ability • Financial Knowledge • To acquire and use

• Budgeting • Application of competency and
• Saving Knowledg proficiency
• Borrowing • Skills and Confidence
• Investment • Behaviour and
Attitude

1. Core Competencies

It was found that to be financially literate an individual mush have expertise in

the following core competencies-

A. Numerical Ability
B. Budgeting
C. Saving
D. Borrowing
E. Investment

A. Numerical Ability

Numerical ability means the basic calculations required for day to day living.
This may related to the calculations associated with the purchasing of goods, discount
calculations, paying household bills, calculating interest on loans, calculation of
simple and compound interest on savings deposited in banks etc. Without having
numerical skills it would not be possible to be financially literate.

[28]
 Introduction

B. Budgeting

Budgeting is the process of balancing expenses with the income. Making a

plan of spending your money is known as budgeting. Budgeting helps in keeping the
track of finances and reducing unnecessary expenditures. It helps in determining in
advance whether there is enough money or not; if not, it helps in prioritising the
spending and focusing on achieving that objective which is most important to you.

Figure 1.11: Concept of Budgeting

C. Savings

Saving is a part of income which is not spent. In other words, it may be said
that keeping aside a part of income for future use is known as saving. Savings may be
done for a short time or maybe for the long term. Savings can also be defined as
money that is saved through a bank or any other financial organization that provides
the capability to meet future financial emergencies or unexpected expenses.
Generally, these types of savings are done for a long period but the growth rate of
money is very low. The motive of saving is very obvious and simple that is to remain
prepared for the future and to keep the money safe so that it can be used whenever the
situation demands so.

[29]
 Introduction

D. Borrowing

Borrowing is the process of receiving something in exchange for an obligation

to pay back something. In today‟s world almost every people have some borrowings
from banks or other financial institutions. For borrowing, it is very necessary to
understand between secured and unsecured personal loan as well as between fixed and
variable interest rates. The core competency of a financially literate person is the
ability to understand debt, and the processes involved to avoid it, reduce it and repay
it. It also relates to competence in using loans (Lusardi and Tufano, 2009).

E. Investing

Investing is the process of buying a financial product or any valued item with
the anticipation that positive returns will be received in the future. In general,
investment means putting the saved money in various financial products like stocks,
mutual funds, gold, etc. to earn returns and growth of wealth with taking into account
the risk factor. Hiroshi (2002) identifies three criteria for choosing investments viz.
safety, liquidity and profitability. As To make saving and investment decisions,
individuals need to think about the savings needs, objective of investment, risk
tolerance ability, collecting and processing information from various sources (ASIC,
2011).

2. Proficiency

To be financially literate all the five core competencies is necessary, but

knowing these will not fulfil the purpose, an individual must have skill in dealing with
these areas. Therefore, an individual must have skill, ability and expertise in the core
competencies supported by a positive behaviour and attitude towards money
management. It includes-

A. Financial Knowledge
B. Application of Knowledge
C. Skill and Confidence
D. Behaviour and Attitude

[30]
 Introduction

A. Financial Knowledge

Cathy (2002) defined financial knowledge as “understanding key financial

terms and concepts needed to function daily in society”. “Financial knowledge can be
defined as “understanding issues related to personal finance” (Robb & Woodyard,
2011).

B. Application of Knowledge

Having financial knowledge is not enough; application of financial knowledge

is must. Various studies conducted by PACFL (United States, 2008), Task Force on
Financial Literacy (Canada, 2010), Financial Literacy Foundation (Australia, 2008)
focuses on the importance of application of financial knowledge to be financially
literate. HM Treasury (2007) stated that financial capable individuals can plan ahead,
find and use information, know when to take advice and can understand and act on the
advice received which ultimately helps in participating in the financial market.

C. Skills and Confidence

For application of knowledge skill is required so that financial resources may

be managed effectively. Without skill and confidence it is not possible to take
financial decisions thus achieving in financial wellbeing of an individual. “Financial
literacy may be defined as having the skills, knowledge and confidence for making
responsible financial decisions” (Sandra Huston, 2010). Remud (2010) stated that
financial literacy definitions may be grouped into five categories such as having the
knowledge of financial concepts, capability to communicate financial concepts, skill
of managing personal finances, ability of making appropriate financial decisions and
confidence in planning for future financial needs effectively.

D. Behaviour and Attitude

To be financially literate an individual must have positive behaviour and

attitude towards, money management, budgeting and planning, savings and

[31]
 Introduction

investment. Xiao (2008) defines “financial behaviour as any human behaviour which
is relevant to money management. The common financial behaviour includes cash,
credit, and saving behaviours”. Financial attitude is defined as a state of mind,
opinion, and judgment of a person about finances (Pankow, D. (2012). Attitudes
include whether people live for today or for the future, or whether insurance is
necessary or preferences for risk etc. (Financial Literacy Foundation, Australia,
2008).

3. Opportunity to acquire and use Competency and Proficiency

Participation in economic life should maximise life chances and enable people
to lead fulfilling lives and this requires knowledge and competence, ability to apply
that knowledge and opportunity and environment to act (Elizabeth and Margaret,
2007). To use knowledge and skills there must be the availability of opportunity in the
financial market. The opportunity here focuses on- equal distribution of financial as
well as social resources so that an individual may participate in the financial market to
fulfil his required needs. A financial literate individual has financial knowledge, skill
and confidence to use that knowledge and proficient enough to grab the financial
opportunities, knows from where and how information can be accessible so that
financial wellbeing may be achieved.

2.3. Investment

Investment is a process of sacrificing something today in the anticipation of

gaining something in future. The word investment can be defined in many ways
according to different theories and principles. It is that term which can be used in a
number of contexts. According to economics, investment is the utilization of
resources in order to increase income or production output in the future. According
to finance, the practice of investment refers to the buying of a financial product or
any valued item with the anticipation that positive returns will be received in the
future. According to business theories, investment is that activity in which a

[32]
 Introduction

manufacturer buys a physical asset, for example, stock or production equipment, in

expectation that this will help the business to prosper in the long run.

In general, investment means putting the saved money in various financial

products like stocks, mutual funds, gold, etc. in order to earn returns and growth of
wealth with taking into account the risk factor. The moment savings start earning
returns, it becomes investment.

The deployment of money or other assets in the anticipation of gaining future

benefits is known as investment. In investment the individual forgoes something of
value at the moment, with a hope to get benefit from that sacrifice in future.
Investment could be done in the form of capital investment, equity investment,
investment in lands, stock investment, retirement investment planning, financial
market investment, share market investment, portfolio investment, gold investment,
business investment and real estate investment.

In nutshell, it can be said that there are three dimensions of investment such as
today‟s sacrifice, time and prospective future gain. In other words, investment means
the use of today‟s money in the expectation of making more money in future. Figure
1.12 shows the dimensions of investment.

Figure 1.12: Dimensions of Investment

Time

Sacrifice Future Gain

Investment

[33]
 Introduction

2.3.1 Driving factors for Investment

One of most important reasons for which an individual makes an investment is

to earn income. It may be in the form of interest earned on principal amount,
dividend received on shares or in the form capital appreciation. Income or capital
appreciations are the two main factors of employment of funds (Pandian, 2001).
Another factor is the Liquidity; investment product that is easily saleable or
marketable or realizable with no loss of time possesses the element of liquidity. An
individual generally prefers liquidity for his/her investment with good return and at
minimum risk. The next important factor is safety and security of the funds;
Investment Avenue that features assurance of return with no loss of money and time is
considered as a safe investment product. Investors always want assurance of return of
capital with no loss of money. One of prime factor of investment is the risk; Risk is
innate in any investment. It may be defined as capital loss, postponement in capital
repayment, default in paying of interest and inconsistency of returns. Individual
considers maximisation of return with given risk while making investment decision.

2.3.2 Investment Avenues

There are various investment instruments available in the Indian financial

market, among them some are highly liquid, some are marketable while others are
non- marketable; some involve high risk whereas some are risk free. Individuals have
to choose among the alternatives as per their needs, preferences, risk tolerance and
expected return. The Reserve bank of India classifies investment instruments into two
subheads-

1. Physical Investment- Investment in silver, gold or real estates.

2. Financial Investment- Investment in bank deposits, insurance, mutual funds
and shares etc.

SEBI and NCAER (2011) identifies the eight investment instrument which
are available in the Indian financial market such as post office saving schemes like
POMIS/ NSC/ KVP, PPF etc., bank deposits, insurance & pension plans, mutual

[34]
 Introduction

funds, real estate, precious metals, bonds & debentures and shares as given in the
following fig. 1.13-

Figure 1.13: Investment Avenues

Bank
Deposits Post
Office
Shares Saving
Schemes

Bonds/ Insurance
Investment
& Pension
Debentures Aveneues
Plans

Mutual
Real Estate
Fund
Precious
Metals

1. Bank Deposits

The investments in bank deposits are available in the form of fixed deposits,
post office fixed deposits and company fixed deposits. It is risk free investment
avenue and higher liquid in nature and offers normal return. Bank offers various types
of deposits account like savings account, fixed deposit account and recurring deposits
account etc.

2. Post Office Saving Schemes

There are various saving schemes are being offered by post office like national
saving certificate, kissan vikas patra, public provident fund etc. These are the safest
investment avenues and provide a bit higher interest rate as compared to bank
deposits. Investment in post office saving schemes are also qualifies for exemption
under the Wealth Tax Act.

[35]
 Introduction

3. Insurance and Pension Plans

Insurance and pension plans are one of the most important and preferred
investment avenues in India. Besides the endowment policies unit linked insurance
plans are very popular in India nowadays. Insurance helps in sharing the risk or
spreading the risk, provides financial protection against loss. Individual may get tax
rebate on some policies as well as earn reasonable interest on their invested insurance
premium.

4. Mutual Fund

Mutual fund is a pool of funds and it has a collection of securities. It acts like
an intermediary which collects money from the investors and on their behalf invests
in various securities. It diversifies the investor‟s risk because it makes the portfolio in
which varieties of securities are considered as per the requirement and objective of the
investors. It sells units of the funds to the investors, return will be given periodically
or at the maturity; it charges a fees for their services. It is a moderate risk investment
instrument.

5. Precious Metals

Precious metals is very popular investment avenue in India, it has a moderate

risk and available in physical form. Investments could be done in the form silver, gold
coins, jewelleries or bars. It acts like a hedge against inflation. Nowadays many banks
as well as companies provide loans against gold.

6. Real Estate

Nowadays, real estate is also preferred as investment avenues in India. It

provides very attractive return therefore individuals are shifting their interest from
traditional to this modern investment avenue. Investing in real estate may involve the
management, purchase, possession, selling and rental of house property or land for
profit making. There are various banks and financial institutions which provide loans
or finances for buying or constructing a residential or commercial flat; interest on
these loans are tax deductible up to certain limit.

[36]
 Introduction

7. Bonds/ Debentures

A bond is a fixed income security issued by a company or government.

Purchasing a bond means an individual is lending his/ her money to the company or
government. The issuing company is knows as borrower and the lender is known as
investor. The lenders earns fixed interest as fixed by the borrower at the time of
issuing at periodically may be annually, quarterly or semi annually and receives
recovery amount on the maturity date. The main appealing feature of bonds is that it is
relatively safe and stable. But, because there is little risk involved in it, the potential
return is also less. Generally, the rate of return on bonds ranges between 7-10%
annually.

8. Shares

Equity as an investment avenue offers potentially high return but involves

high risk too. There is a possibility of losing a part of invested capital in the case of
loss. Investment in equities may be made directly by purchasing the shares of a
company from the financial market or it may be done through mutual fund. In good
times, it may offer return of 15 to 50% annually.

2.4. Investment Decision Making

A determination made by directors and/or management/ individual as to how,

when, where and how much capital will be spent on investment opportunities. The
decision often follows research to determine costs and returns for each option
(business dictionary.com). Investment decision making may be defined as the
process of selecting investment avenues from available options. The individuals make
financial decisions on a daily routine, even though that decision is vital for every day
survival or may be a daunting task (Karlsson et al., 2004).

Harrison (2003) suggested that “the past investment experience and expertise
often influence the investors‟ decision with regard to purchase of financial stuff.
SEBI and NCAER (2011) reported that “liquidity and safety are the two major
considerations while making the choice of assets for investment”.

[37]
 Introduction

As per Chrisann Palm (2014) financial risk tolerance, source of advice and
information, investment objective and socio-demographic characteristics are
associated with investment decision. Gayatri jagdale, founder fund-matters (2018)
identifies the eight important elements of investment decisions viz. goal, age, risk
capacity, type of asset, time horizon and returns expectations. Another study found
three important elements of investment decision i.e. time, risk & return and objective
of the investment (Prakash Gagdani, CEO, 5paisa, 2018).

2.4.1 Things to be considered before making Investment Decision

1. Identify your Personal gaol to be achieve

Before making an investment decision, an individual must have to identify

their needs and goals to be achieved in the long run. The first step to making a
successful investment decision is to make a plan and check your financial situation.
Because not necessarily every investment will give you a good or high return.
Therefore, you must be clear about your goal then only you can gain financial security
in the long run.

2. Identify your risk tolerance level

Since every investment involves some amount of risk, therefore an individual

must identify their comfort zone or the degree of risk they can take. In investment,
there is a possibility of losing entire principal money or earning a very high return.
The compensation on taking risk is the possibility of receiving a greater return on
investments. If an individual has a long term financial goal, they may make more
money by investing their money in assets such as stocks and bonds which involves
higher risk; rather than restricting themselves to less risky investments instruments
which yield a low return.

3. Make Investment Portfolio

Before making an investment decision it is very necessary to make an

appropriate portfolio of investment instruments. To lessen the risks of investing

[38]
 Introduction

diversify your investment. It is common sense: don't put all your eggs in one basket,
because if you invest your whole amount in one category, the chances of getting a low
return or losing your money become higher. Therefore a portfolio must have a proper
mix of assets such as stocks, bonds and cash etc. It was observed that stocks, bonds
and cash have not gone up and down at the same time. By investing in more than one
asset, an individual will reduce the chances of losing their money and portfolio‟s
overall investments will give a certain amount of return. Asset allocation is necessary
because it has a wider impact on the financial goals of an individual; if portfolio will
not include enough risk, the investment will not earn a larger return which meets your
financial goals.

4. Creation of Emergency Fund

Before investing, it is important to put your money in a savings product so that

you may fight against future emergencies. An individual must have a mix of short
term and long term investments; moreover, they must have a range of high liquidity to
low liquidity assets in their portfolio. If a need arises or some emergency like medical
issue or unemployment may happen the assets which are highly liquid in nature may
be converted into cash to cope up with future emergencies.

5. Review of Portfolio Occasionally

It is very important to rebalance your portfolio so that proper asset allocation

mix could be achieved. By doing so, it will ensure that portfolio is not
overemphasising on one or the same types of asset categories and will also ensure that
your risk is not concentrated on one but it is diversified in a mix of assets. Moving of
asset category which is not doing well to the asset which is yielding good return is a
wise move in investment decision making. It is suggested by many financial experts
that an individual may rebalance their portfolio regularly such as every half-yearly or
annually.

[39]