2.1 LITERATURE REVIEW:
Hastings, Madrian & Skimmyhorn (2013) in their study found that respondents possessing higher cognitive and numerical abilities were more likely to exhibit higher levels of financial literacy.
Atkinson and Messy (2012) mentalities are a fundamental segment of money related education and conduct and if people had a pessimistic demeanour towards investment funds they would be less disposed to direct conduct in pursuance of the same.
Barbic Lucic & Chen (2018) in their study on measuring responsible financial consumption behaviour found thatfinancial decision making is a very complex field involving a load of variables, multiple motivations could be affecting purchase decisions.
Tatzel (2003) people that believe money represented power or status were more likely to engage in overspending or irresponsible consumption decisions as a result of the same.
Stolper & Walter (2017) in their study Financial Literacy, Financial Advice and Financial Behaviour have concluded that around the world financial literacy levels are highest among Germans but even in such a country, half of the respondents were not able to answer the Big Three questions (Lusardi and Mitchell,2008)correctly which meant there was a massive room for improvement. They also summarized that in Germany and other countries least educated and lower income population were the ones with the least financial literacy and therefore were prone to making financial mistakes.
Visa Financial Literacy Survey (2012) found that Indians are among the least financially literate people across the globe under which the youngsters and women were the most illiterate with respect to financial literacy. The survey ranked India as 23rd out of 28 countries represented in the survey.
Parimalakanthi & Kumar (2015) observed that education of investors was an important aspect for investors in the city of Coimbatore as they wanted to gather as much information from sources like their friends, peers and investment experts as they could before arriving at an investment decision. Most of the investors invested in savings accounts followed by tangible instruments like Gold & Silver. They suggested that for many investors the investments were last resort rather than having a plan beforehand and investing according to it which was the reason for investments not doing very well.
Cornelia & Mihaela (2009) consumer behavior is structured in two components being buying and consumption behavior, which states all other advantages being equal the customer is likely to choose that investment that offers them the most gain. In addition to this, fear or regret is another factor that affects the behavior of the consumer which comes into play when the investor doesn’t trust the information available with him/her and/or is not likely to be able to process such information. Apart from this demographic, cultural and economic factors also determined consumer behavior. The paper mentions that differences in the cultural values of investors in the European countries determine the investment behavior of the investors.
Sultana & Pardhasaradhi (2012) Indians are more likely to choose risk free investments even if they’re well educated and have higher levels of income owing to the risk awareness inherent in the Indian mindset.
Geetha & Ramesh (2011) analyzed the investment choices of people in the city of Kurumbalur. The author noted that the respondents were not very aware of choices such as stock market, equity, bonds and debentures. They instead were aware of and gave more importance to traditional choices such as Life Insurance, PPF, NSC, and bank deposits along with small savings avenues such as post office savings. The author also notes that income levels play a huge role in consumers making safer choices like bank deposits, PPFs or higher risk avenues like stocks, mutual funds etc. In the work we also find that with age group of 51-60 years people preferred life insurance more than other avenues.
Charkha & Lanjhekar (2018) in their work involving studying the investment and saving patterns of privately employed Pune residents found that even though majority were well aware of the different investment avenues they preferred to invest in bank deposits and real estate as safety was a very important factor considered for investment as a result of which other avenues were less favourable. The author also notes that the city as such has a real estate market which was always on the up which meant people favoured investment in the same. The study also finds that there was a significant relationship between level of income and awareness of investment alternatives with higher income groups being more aware.
Bhushan, Puneet&Medury, Yajulu. (2012) focused on investment preferences by working adults and found that gender played a role in deciding investments as males preferred Mutual funds and Life Insurance policies whereas their counterparts preferred recurring deposits and Market Investments. The study also indicated that type of employment was a factor as privately employed individuals were less risk averse as compared to government employees who played it safe. The study also found that married individuals preferred safer instruments even if they lacked returns.
Giri (2018) found that beliefs and subjective norms affect attitudes towards purchase behaviour. The purpose of buying insurance policies could be broken down into tax saving, bequest purposes or because of social influences.
Nor & Noryati (2012) higher income and greater investment experiences increases the level of risk the investors are willing to take and also increases their tolerance level of such risk and as the tolerance rises the investors end up choosing riskier investments.
2.2 OBEJCTIVES OF THE STUDY:
- To develop a financial literacy index using the big three question model. (Lusardi & Mitchell, 2008)
- To explore the role of financial literacy index on investment behaviour.
- To explore the determinants of various investment behaviour of respondents.
- To understand the preference of the respondents amongst several financial products.
2.3 RESEARCH METHODOLOGY:
The sample was drawn primarily from occupants of metro cities being Kolkata, Mumbai, Delhi and Chennai apart from which responses were received from residents of other cities including Hyderabad, Bengaluru, Ludhiana and Bhubaneswar.
2.3.2 Sampling Technique:
The study used convenience sampling techniques for collection of primary data.
2.3.3 Sample Size:
A total of 100 responses were received which were complete and ready to be analysed for the purposes of this paper.
2.3.4 Data Collection:
The primary data in a survey model was collected through the use of Google forms which were sent to random groups of people through the use of social media platforms. The paper utilizes a descriptive research method. The respondents
The survey form was split into four sections to enhance the respondents’ accuracy. In the first section of the survey, the respondents were asked simple questions relating to their demographic details, their type of residence, number of members in the household, occupation, income levels and were asked to give an estimate as to the portion of their income which they use to invest in various investment avenues.
The second section was targeted at attaining information as to the Investment choices of the investor. For this, the respondents were asked to rank their investment preferences based on their actual investments. The choices for which were Fixed Deposits, Mutual Funds, Life Insurance, Shares, Debentures, Corporate Fixed Deposits, Gold and other avenues which was left open for the respondents to reply in which they stated other investment avenues like Real Estate and Provident Funds.
The third section of the survey was targeted at measuring the levels of financial literacy of the respondents. There exists no universal definition of financial literacy and how its measured. Therefore this research adopts a module which has been devised based upon the big 3 questions (Lusardi & Mitchell ,2008) as it is a widely popular measure of financial literacy as has been seen in many studies conducted all over the world that have tried to measure the financial literacy.
The questions involved elementary calculations related to concepts of
- Interest compounding
- Understanding how inflation works
- Understanding risk diversification.
The questions are fairly simple and straight forward and thus are an appropriate measure. A version of the big 3 questions more suitable for the Indian respondents was designed for this paper and thus the 3 questions that were asked.
In the final section they were asked 19 questions to understand their investment behaviour represented on a Likert Scale with options being, ‘strongly agree’, ‘agree’, ‘neutral’, ‘disagree’ and ‘strongly disagree’.
2.3.6 Statistical Tools and Technique:
Factor analysis technique has been used to study investor behaviour which primarily involves data reduction and summarization on the lot of correlated variables/attributes being studied using the IBM SPSS Statistics Package. The relationships among the attributes are analyzed and represented in terms of the underlying factors.
Chi – Square test was applied in testing hypothesis at 5% level of significance. Descriptive analysis was utilized. Data was tabulated and analyzed using Microsoft Excel, 2013.
Garret Ranking technique was used to determine the preference based ranking of several investment products. The respondents were asked to rank their investment preferences which were transformed into unit scores by using the following formula
Per cent position = 100 (Rij – 0.50) / Nj
Rij - Rank given for the ith investment by the jth respondent
Nj - Number of investment ranked by the jth respondent
The percent position is converted into scores on the basis of the table formulated (Garett &Woodworth, 1969). The next step includes for each factor the scores of the individual respondents’ being summed, then divided by total number of respondents for whom scores were added. These mean scores for all the factors were arranged in descending order and thus ranked. (Garret HE, 1981)
2.4 LIMITATIONS OF THE STUDY:
This research has its set of constraints that range from its methodology to its scope.
The financial literacy tests incorporates ‘the big-3‘. The benefits to the big – 3 question model in assessing financial literacy include the ease of adding it to questionnaires and assessing the degree of knowledge of general financial principles and elementary calculations of the investors however this is in no way a complete measure of precisely measuring the financial literacy levels as there are many other questions and measures one must embrace to accurately ascertain the financial literacy levels.
The sample size of 100 respondents though large is still insignificant when compared with the 1.2 billion population of India with different demographic aspects unique to the country. The results are location specific to metro cities and certain urban cities which the respondents belong to, thus not representative of the different socio economic variables existing in India.
The Big-3 questions could be built upon by adding other elements to further researches including dimensions such as retirement planning, tax and legal implications, risk taking ability among others.
In determining the investor behavior in pursuit of an investing decision into financial products a set of 19 questions were asked in this study. However, there are many other questions that could be asked of the respondents which would give a complete picture of the investor behavior and just like in assessing financial literacy this aspect as well could be made even more representative of real world scenarios by asking further questions related to this topic.