Financial literacy–a regulator of intended investment behaviour: analysing the hypothetical portfolio composition

Purpose

The investment behaviour of individuals has been a major area of interest for several researchers and policymakers due to its great impact on the economy. This study aimed to assess the investment behaviour of individuals in light of their risk appetite and how financial literacy regulates this relationship.

Design/methodology/approach

A self-administered structured questionnaire was used to collect responses from individuals using purposive and convenience sampling techniques. Individuals were presented with 16 investment avenues widely offered by the Indian financial market to choose from to construct a hypothetical portfolio. The association between risk appetite, financial literacy and the composition of the hypothetical portfolio was analysed using a gologit model.

Findings

Increased risk appetite increased the probability of respondents creating a portfolio with a greater proportion of risky assets and less diversification. Lower levels of financial literacy pointed towards portfolios with traditional and low-risk avenues. The results also revealed a significant moderating impact of financial literacy on risk appetite and the creation of the type of a hypothetical portfolio.

Research limitations/implications

Even though the intended behaviour is a close estimate of actual behaviour, there is a possibility of deviation that cannot be ignored.

Originality/value

The present study provides insights into how individuals make portfolio choices by incorporating risk appetite and diversification factors whilst making investment decisions, thereby expanding the literature from an emerging economy perspective. The role of financial literacy as a moderator has not been studied in the domain of hypothetical portfolio creation in India, which has been empirically explored in the current study.