Financial Literacy & Investment Decisions of Indian Investors -A Case of Delhi & NCR

Pallavi Seth1 G.N.Patel2 K.K.Krishnan3

AbstractPurpose: The purpose of this paper is to assess the level of financial literacy among people residing in Delhi and National Capital Region (NCR) who invest in different financial instruments, like Post Office Savings Scheme, Mutual Funds, Life Insurance, Stock market etc. According to RBI, Financial literacy can broadly be defined as providing familiarity with and understanding of financial market products, especially rewards and risks, in order making informed choices. The study analyses the relationship between financial literacy and other factors like age, income and education. The study also tries to find out the financial instruments which are considered to be the most reliable and the source of information which is mostly used by the individuals while taking investment decisions. Design/Methodology/Approach: A questionnaire was developed for the study; it consisted of 34 questions excluding the demographic data of the individuals. The questionnaire examined the financial literacy of the individuals by asking basic questions about savings, interest rates, nomination, maturity period of NSC, minimum amount to be deposited in Public Provident Fund etc. Those who gave 60 % and above correct answers were considered as qualified financially literate. There were also questions, which indicated which financial instruments are preferred by the individuals most. Also, it had questions that relate to the factors, which have made a great impact on the minds of the individuals and on the basis of which they take their decisions. 140 questionnaires were distributed in different parts of Delhi and NCR in April 2010, out of which 110 were received and 105 have been taken for the study, as 5 were incomplete. It includes a mix of middle class and lower middle class people and the age group of 22 yrs to 59 yrs having diverse educational qualifications.

Research Fellow, Birla Institute of Management Technology, Greater Noida Professor, Birla Institute of Management Technology, Greater Noida 3 Professor, , Birla Institute of Management Technology, Greater Noida
2

Findings: The study indicated that the financial literacy of investors in Delhi and NCR was different for different financial instruments. Around 96% of them have savings account in the banks, but the mere acquaintance with banks is not adequate, as only around 30% had knowledge about National Savings Certificate & Public Provident Fund. While 98 % of the investors knew about Life Insurance, only about 45% preferred Life Insurance as the most effective financial instrument, which would be helpful at the time of contingencies. Around 92 % of the investors knew about Mutual Funds but only 24 % preferred them. Financial literacy is found to be affected by age, income and educational level of the individuals. High-income respondents had high financial literacy than lower income people. The study also revealed that people consider Life Insurance as the most effective financial instrument followed by Fixed Deposits in banks. It has also been found that most of the people relied on telecast in the T.V channels or advertisements put out in the newspapers and magazines to learn about financial products followed by advice from friends. But, while investing in share market, around 21% people relied on brokers. Implications/Limitations: Methods of savings such as post office savings schemes have great scope for propagation in the area of study, if post offices implement fast services like banks .As the prevalence of equity cult is found low, there is scope for expanding it. Also, we can conduct the same type of study to analyse the tax literacy of the Indians. Keywords: Financial Literacy, Indian Investors JEL Classification: G1 and G2 Paper Type: Research Paper

1. Introduction:
1.1Definition of Financial Literacy: Financial literacy or financial education can broadly be defined as providing familiarity with and understanding of financial market products, especially rewards and risks, in order making informed choices. Viewed from this standpoint, financial education primarily relates to personal finance to enable individuals to take effective action to improve their overall well-being and avoid distress in matters that are financial. Financial literacy goes beyond the provision of financial information and advice. The focus of any discussion on financial literacy is primarily on the individual, who usually has limited resources and skills to appreciate the complexities of financial dealings with financial intermediaries on a day-to-day basis.4

Reserve Bank of India (RBI) website, retrieved from http://www.rbi.org.in/scripts/PublicationsDraftReports.aspx

The Organization for Economic Co-operation and Development (OECD) has defined financial education as 'the process by which financial consumers/ investors improve their understanding of financial products, concepts and risks, and through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being'. Thus, financial literacy is the ability to know, monitor, and effectively use financial resources to enhance the well-being and economic security of oneself, one's family, and one's business.5 Financial literacy may also be defined as the ability to make informed judgments and to take effective decisions regarding the use and management of money.6 This definition places emphasis on the skills and areas of knowledge that are likely to be necessary to make informed judgments. 1.2 Importance of Financial Literacy: Financial literacy has assumed greater importance in the recent years, as financial markets have become increasingly complex and as there is information asymmetry between markets and the common person, leading to the latter finding it increasingly difficult to make informed choices. Financial literacy is considered an important adjunct for promoting financial inclusion and ultimately, financial stability. Both developed and developing countries, therefore, are focusing on programmes for financial literacy/education. In India, the need for financial literacy is even greater considering the low levels of general literacy and the large section of the population, which still remains out of the formal financial loop. In the context of 'financial inclusion', the scope of financial literacy is relatively broader and it acquires greater significance since it could be an important factor in the very access of such excluded groups to finance. Further, the process of educating may invariably involve addressing deep entrenched behavioral and psychological factors that could be major barriers. In countries with diverse social and economic profile like India, financial literacy is particularly relevant for people who are resource-poor and who operate at the margin and are vulnerable to persistent downward financial pressures. With no established banking relationship, the un-banked poor are pushed towards expensive
Reserve Bank of India (RBI) website, retrieved from http://www.rbi.org.in/scripts/PublicationsDraftReports.aspx
This definition has been adopted by Australian Securities and Investment Commission. It is based on the definition developed by the National Foundation for Education Research in the UK in 1992 and was subsequently used in Australia by ANZ bank in their survey of adult financial literacy.
6
5

alternatives. The challenges of household cash management under difficult circumstances with few resources to fall back on could be accentuated by the lack of skills or knowledge to make well-informed financial decisions. Financial literacy can help them prepare ahead of time for life cycle needs and deal with unexpected emergencies without assuming unnecessary debt.7 To understand financial planning, a person should be financially literate to know the importance of preparing household budgets, cash-flow management and asset allocation to meet financial goals. Most people save money for future needs but the approach is to save surplus money without preparing household budgets, without prioritising personal financial goals, without properly allocating investments in different asset classes and without understanding the real rate of return (after adjusting for inflation).

2. Review of Literature:
Financial literacy has been studied in many countries from different aspects. Hussein A. Hassan Al Tamimi and Al Anood Bin Kallis research study (2009) on Financial Literacy in UAE, the study finds that financial literacy of UAE investors is well below the needed level. As well as it analyses the relationship between the financial literacy and the influence of the factors that affect the investment decisions. The study found that a significant difference in the level of financial literacy was found between the respondents according to their gender. Women were found to have lower level of financial literacy then men. Also, the result indicates that there is significant relationship between financial literacy and investment decisions. Chen and Volpe (1998) examined the financial literacy of 924 college students from 13 colleges in USA.Also; they investigated the relationship between the financial literacy level and gender, age, nationality, race, income, work experience, academic discipline and class rank. The result of the study indicated that subgroups of academic discipline, class rank, and years of work experience were significantly different in terms of financial literacy level. Non -business majors, women, students in the lower class ranks, under age 30, and with little work experience have lower levels of knowledge. Also, Volpe et al. (2002) conducted a study to analyse the investment literacy of online investors. The study included 530 online investors for the study to find out the difference in financial literacy level on the basis of age, gender, experience, education and income and previous online experience. The study came with the results that level of financial literacy varied with peoples age, gender, experience, education and income. Also, online traders had higher knowledge than others.

Reserve Bank of India (RBI) website, retrieved from http://www.rbi.org.in/scripts/PublicationsDraftReports.aspx

An international OECD study was published in late 2005 analysing financial literacy surveys in OECD countries. A selection of findings included:

In Australia, 67 per cent of respondents indicated that they understood the concept of compound interest, yet when they were asked to solve a problem using the concept only 28 per cent had a good level of understanding. A British survey found that consumers do not actively seek out financial information. The information they do receive is acquired by chance, for example, by picking up a pamphlet at a bank or having a chance talk with a bank employee. A Canadian survey found that respondents considered choosing the right investments to be more stressful than going to the dentist. A survey of Korean high-school students showed that they had failing scores that is, they answered fewer than 60 per cent of the questions correctly - on tests designed to measure their ability to choose and manage a credit card, their knowledge about saving and investing for retirement, and their awareness of risk and the importance of insuring against it. A survey in the US found that four out of ten American workers are not saving for retirement.

The Australian Government8 established a National Consumer and Financial Literacy Taskforce in 2004, which recommended the establishment of the Financial Literacy Foundation in 2005. The foundation created an educational website titled "Understanding Money" shortly thereafter the task force also recognised the need for a social marketing campaign. In 2008 the functions of the Foundation were transferred to the Australian Securities and Investments Commission (ASIC). The Australian Government also runs a range of programs (such as Money Management) to improve the financial literacy of its Indigenous population, particularly those living in remote communities United Kingdom9: The current state strategy involves the FSA spending about 10 million a year across a seven-point plan in United Kingdom. The priority areas are:

New parents Schools (a programme being delivered by pfeg) Young Adults Workplace Consumer communications Online tools Money advice

A baseline survey conducted 5,300 interviews across the UK in 2005. The report identifies four themes:

8 9

Many people are failing to plan ahead Many people are taking on financial risks without realising it

http://www.understandingmoney.gov.au/Content/Consumer/About/ http://www.fsa.gov.uk/pubs/other/fincap_delivering.pdf

Problems of debt are severe for a small proportion of the population, and many more people may be affected in an economic downturn The under-40s are, on average, less financially capable than their elders

There are also numerous charities in the United Kingdom working to improve financial literacy such as Credit Action, The Talking Economics Project, Citizens Advice Bureau and the Personal Finance Education Group. The Financial Services Act 2010 included a provision for the FSA to establish a Consumer Financial Education Body, known as CFEB. CFEB will continue the work of the FSA's Financial Capability Division independently of the FSA from April 26 2010. United States10: The US Treasury established its Office of Financial Education in 2002; and the US Congress established the Financial Literacy and Education Commission under the Financial Literacy and Education Improvement Act in 2003. The Commission published its National Strategy on Financial Literacy in 2006.Additionally, automobile finance companies and retailers provide consumer education through Americans Wellinformed on Automobile Retailing Economics. Research conducted by the Money SENSE Financial Education Steering Committee in 2005 to find the financial literacy level of the Singapore people. The objective of the survey was to find whether Singaporeans have knowledge about financial products and if they are able to take effective financial decisions. The study found out that they have sound knowledge about investments. Dr. Duvvuri Subbarao, Governor, Reserve Bank of India stated in a Valedictory address at the FICCI-IBA annual ConferenceThere are barriers to access financial services emanating from both demand side and supply side factors. From the demand side, the big barriers are the lack of awareness about financial services and products, limited literacy, especially financial literacy of the populace, and social exclusion. Many of the generic financial products are unsuitable for the poor and there is not much of an effort to design products suitable to their needs. On top of that, exorbitant and oftentimes non-transparent fees, combined with burdensome terms and conditions attached to the financial products, also dampens the demand. From the supply side, the main barrier is the transaction costs that the bankers perceive. Because of current low volumes, banks find that extending financial services is not costeffective. Furthermore, lack of communication, lack of infrastructure, language barriers and low literacy levels all raise the cost of providing services and inhibit bankers from the supply side11

http://hsfpp.nefe.org / National Endowment for Financial Education - High School Financial Planning Program - free educational materials and other resources 11 Valedictory address at the FICCI-IBA annual Conference, organized jointly by FICCI and IBA, Mumbai, September 10, 2009.Available online at www.rbi.org

10

A conference was organized by Reserve Bank of India and OECD on 22nd and 23rd March 2010 in Bangalore, a few findings regarding the financial literacy programme in developed and developing countries came out as following (as per the article in Business Line; Wednesday, Apr 28, 2010 by Tanushree Mazumdar- Former Deputy Director, Academic Affairs, Indian Institute of Banking & Finance, Mumbai): There was, however, a difference in the thrust of financial literacy/education drives in these countries vis--vis developing countries like India. So far, in India, the emphasis has largely been on financially educating the rural poor and illiterate. Whether it is the business correspondent/business facilitator (BC/BF) model or the technology-driven banking model that the regulators and banks are currently encouraging, the main focus remains the rural poor. These models have a two-pronged focus: include the financially excluded in the mainstream financial system and financially educate the rural masses about banks, their products, services, procedures, and so on. In developed countries (OECD to be precise), there is greater focus on educating an average family helping it balance its budget, build assets, save for children's education and retirement planning. Financial literacy there takes the form of guiding consumers through the maze of complex financial products, taking confident financial decisions and safeguarding their financial interests, and resisting marketing pitches of financial companies by asking the right questions. There is another difference in the objectives of financial education programmes in the developed and developing countries. In the developed countries, financial literacy is linked to consumer protection.. Better information disclosure, they believe, would go a long way in strengthening regulatory standards for consumer protection. In India, financial literacy is seen as a means to achieve financial inclusion. The thrust is on rural areas. This is not surprising, given that 5.7 lakh out of the six-lakh villages don't have a bank branch. There is, however, a strong case for extending the efforts of financial inclusion to urban areas as well. The Economic Survey 2009-10, says that poverty ratio in urban areas is 25.7 per cent which is only somewhat lower than the 28.3 per cent poverty ratio in rural areas. Today, there are many complex financial instruments available in the country and there is need to take serious initiatives (by regulators, public and private companies) to make more and more people financially literate so that there is no mis-selling in the market. This study analyses the financial literacy level of the people in India by asking basic questions regarding financial instruments and how it affects the investment decisions of the individuals.

3. Statement of the Problem:

India is among the worlds most efficient financial markets in terms of technology, regulation and systems. It also has one of the highest savings rate in the world - our gross household savings rate, which averaged 19% of gross domestic product (GDP) between 1996-97 and 1999-2000, increased to about 23% in 2003-04 and has been growing ever since. While people in India prefer to save, where the savings are invested is a cause for concern. Investments by households have been more into either bank fixed deposits, riskfree government-backed securities and low-yielding instruments, or in non-financial assets. A majority of our households do not use modern financial markets. As per an RBI report, only 1.4% of household savings was invested in equity, mutual funds and debentures in 2003-04. Though this went up to about 4% in 2005-06, it is still very small. Unless the common person becomes a wiser investor and is protected from wrong doings, wealth creation for the investor and the economy will remain a distant dream. We need to convert a country of savers into a nation of investors. Participation in modern finance throws up a number of questions and choices for households like: Do you make household budgets? How much do you need to save every month to meet all your financial goals? How should you allocate your savings into various asset classes and among asset classes to various products? How should you change your asset allocation pattern with age and circumstances? What should be the basis of selecting a mutual fund house, insurance company, bank or lender? Do you know there is a need for diversification of your investments to diversify risk? What are the channels through which financial services are provided? Which one should you use? Such questions and choices appear tough to even urban population not to talk of those in rural areas, where most of Indias population is. When it comes to financial solutions, investors tend to use thumb rules or seek advice from friends and relatives, which are often poor approximations compared to those that follow from a systematic process. If they get bad advice, their outcomes will be poor, and they will start to lose faith in the financial sector. A big improvement of financial knowledge of households is necessary so that they participate continuously in financial markets. Financial literacy plays a significant role in the efficient allocation of household savings and the ability of individuals to meet their financial goals. It also means the ability to seek financial advice.1012

10

Source: Madhu Sinha/ DNA MONEY | 2008-06-30 08:55:35;Sify Home>>Finance>>Default>>Why Financial Literacy is imperative

As the data mentioned in this section reveals the problems faced by middle class people in India while taking financial decisions, the study emphasis to find out the financial literacy level of Indian investors by asking basic questions about financial instruments as well as it emphasis on the factors, which influence financial decisions.

4. Objectives of the Study:

To find out the financial literacy level of the individuals residing in Delhi and National Capital Region. If there is any relationship between Financial Literacy and Age, Income and Education The most preferable financial instruments amongst the respondents and The source of information, which is mostly used by the individuals while taking investment decisions.

5. Research Methodology:
5.1Questionnaire Design A structured questionnaire was prepared for the analysis of financial literacy level of the individuals. It consisted of 34 questions excluding the demographic data of the individuals. The questionnaire examines the financial literacy of the individuals by asking the basic questions about savings, interest rates, nomination, maturity period of NSC, minimum amount to be deposited in Public Provident Fund etc There are also questions, which indicate which financial instruments are preferred by the individuals most. Also, it has the questions that relate to the factors which have made a great impact on the minds of the individuals and on the basis of which they take their decisions. 5.2Sampling and Data Collection The population from which a sample was selected, it consisted of middle class and lower middle class people working in different organizations in the area of Delhi and National Capital Region (NCR). Some of the respondents were directly contacted by visiting the companies and in some companies it was distributed through their managers. The total number of distributed questionnaire was 140 in April 2010, out of which 110 were received and 105 have been taken for the study as 5 were incomplete. It included a mix of middle class and lower middle class people of the age group of 22 yrs to 59 yrs, having diverse educational qualifications.

5.3Profile of the Study respondents: Apart from 34 questions asked to check the basic financial knowledge of the respondents, demographic data has also been collected which is shown in the Table I. About 22% of the respondents were female and 78 % percent were male. In terms of annual income, around 22 % were in the income slab of Rs 1 to Rs 2 lacs, 46 % were having income of 46 % and 32 % were in the income slab of Rs 4 lacs and above annually. With respect to age, around 46 % were in the age group of 23 to 29 years, 38 % of the respondents were in the age group of 30 to 39 years and around 16 % of the respondents were in the age group of 40 to 59 years. In terms of education, around 9.5 % o the respondents were having educational qualifications till 10th standard, 10.5 % of the respondents were having educational qualifications till 12th standarad, 40 % of the respondents have completed their graduation and around 40 % of the respondents have completed their Post Graduation as shown in the Table I as well as the pie-chart as well.

Table I: Profile of the study respondents Characteristics Number Gender Male 82 Female 23 Annual Income in Rs 1 lac to 2 lacs 24 2 lacs to 4 lacs 48 4 lacs and above 33 Age 23-29 48 30-39 40 40-59 17 Education High School 10 12th Standard 11 Graduation 42 Post Graduation 42 Percentage 78.1 21.9

22 46 32 46 38 16 9.5 10.5 40 40

Chart I
Total Number:105 Gender Male Female Annual Income in Rs 1 lac to 2 lacs 2 lacs to 4 lacs 4 lacs and above Age 23-29 30-39 40-59 Education High School 12th Standard Graduation Post Graduation

6. Data Analysis and Results:

6.1 Financial Literacy Level of the Individuals The study had asked basic questions about the financial instruments to the respondents, which covered the main aspects of investment. Some of the questions directly related to the financial literacy level of the individuals are described in the Table II below. Also, it contains the percentage of questions answered correctly by the respondents. Table II: Questions asked to the respondents

S.No
1 2 3 4 5 6 7

Question
Q3 Q5 Q6 Q8 Q11 Q12 Q13

Question Subject
Savings Account Interest rates on Saving Account Life Insurance Nomination Income Tax Benefit in Fixed Deposit Minimum Period for Investing in Fixed Deposit Nomination in Savings Account & Bank Fixed Deposit

Percentage
96 72 98 92 55 15 78

S.No
8 9 10 11 12 13 14 15 16 17 18 19 20

Question
Q14 Q17 Q18 Q19 Q20 Q21 Q22 Q23 Q24 Q25 Q26 Q27 Q28

Question Subject
Use of Post Office for Savings Heard about Public Provident Fund Minimum Amount to be deposited in PPF Heard about National Savings Certificate Tax Benefit in NSC Nomination in NSC Maturity period of NSC Heard about Mutual Funds Invested in Mutual Funds Tax Benefit in Mutual Fund Heard about SENSEX/National Stock Exchange Use information available on SENSEX/NSE Invested in shares

Percentage
24 78 34 81 67 54 25 92 57 55 91 46 54

People have different levels of financial literacy for different financial instruments as shown in the table above. Financial literacy is imperative for persons welfare and well being as low financial literacy would lead to improper savings and investments which can lead to financial problems. For the study, we have assumed that at least 60 % of the answers should be given correctly as most of the questions are basic. So, those respondents who have given the answers of 60 % and above questions correctly are qualified as financially literate. The question related to Fixed Deposit got the least score as only 15 % have knowledge about minimum period of investment in F.D, and the question related to Life insurance got a high score of 98 %, this shows that people have knowledge about Life Insurance. Around 80 % of the respondents have purchased Life Insurance. Questions related to Post office are mostly answered wrongly by the respondents; this shows the narrow inclination towards Post Office schemes saving instruments. Although, Post Office schemes are giving better returns than banks still these are not popular in urban areas. There can be two main reasons for this: Lack of awareness and Insufficiency of Services. Banks have kept the TAT-Turn around Time for services i.e. in how many hours or minutes one transaction has to be completed but this has not been done yet in Post offices. One way to attract clients would be to introduce such measures which would give positive signals for efficient services, they do not consider any benchmarking to services. Also, Post Offices should offer a welcoming preference to its customers. People have little knowledge as well as inclination towards Post Office Schemes as only 24% have said that they use Post Office Schemes for Savings. Post Office organizations, as such, can be considered as one of the biggest banks of India, however their schemes are undersold.

6.2 Effect of demographic variables on financial literacy: Following Null hypotheses was made for the study:

H1: There is no significant relationship between income and financial literacy of the respondents. H2: There is no significant relationship between age and financial literacy of the respondents. H3: There is no significant relationship between education and financial literacy of the respondents.
6.3 Results: To test the null hypotheses stated above, Chi-Square test was applied, the results of the chi-square test shows that

There is a relationship between financial literacy and income of the individuals and hence the null hypothesis is rejected
So, if the income of the individual increases, the more he/she knows about managing the finance.

There is no relationship between age and financial literacy level of the individuals and hence the null hypothesis is accepted.
So, we can say that financial literacy level is more or less the same for the individuals of different ages.

There is no relationship between education and financial literacy levels of the individuals and null hypothesis is accepted in this case
It may well be so, as we know that inclusion of managing ones finance in the course curriculum in our schools and colleges is very minimal (except those who do specialization courses in finance etc)

7. Important Findings:
Around 96% of respondents have savings account in the banks, but the mere knowledge of banks is not adequate to ensure adequate financial literacy, as only around 30% have knowledge about National Savings Certificates and the Public Provident Fund, two important saving schemes.

While 98 % of the investors know about Life Insurance, only about 45% prefer Life Insurance as the most effective financial instrument which would be helpful at the time of contingencies. Around 92 % of the investors know about Mutual Funds but only 24 % prefer them. The study also revealed that people consider Life Insurance as the most effective financial instrument followed by Fixed Deposits in banks so the most preferable financial instrument among the respondent is buying Life Insurance policies. It has also been found that most of the people rely on advertisements telecast in the T.V channels or advertisement put in the newspapers and magazines to learn about financial products followed by advice from friends. But, while investing in share market, around 21% people still relied on brokers.

References:
Chen, H. and Volpe, R. (1998), An analysis of personal financial literacy among college students, Financial Services Review, Vol. 7 No. 2, pp. 107-128. Hussein A. Hassan Al-Tamimi & Al Anood Bin Kalli Financial literacy and investment decisions of UAE investors, The Journal of Finance, Vol. 10, No. 5, 2009, pp 500516,Emerald Group Publishing Limited 1526-5943 Australian securities and Investment Commission Financial Literacy in Schools, consultation paper 45, downloadable at www.fido.asic.gov.au Monetary Authority of Singapore (2005), Quantitative Research on Financial Literacy Levels in Singapore, report, July ACNielsen Research (2005), ANZ Survey of Adult Financial Literacy in Australia: Final Report, ACNielsen Research, Melbourne, November. Reserve Bank of India, retrieved from the website www.rbi.org.in Valedictory address at the FICCI-IBA annual Conference, organized jointly by FICCI and IBA, Mumbai, September 10, 2009.Available online at www.rbi.org Business Line; Wednesday, Apr 28, 2010, Tanushree Mazumdar- Former Deputy Director, Academic Affairs, Indian Institute of Banking & Finance, Mumbai http://hsfpp.nefe.org / National Endowment for Financial Education - High School Financial Planning Program - free educational materials and other resources Article on Why Financial Literacy is imperative published in DNA MONEY by Madhu Sinha, Certified Financial Planner, member FPSB

http://www.understandingmoney.gov.au http://www.fsa.gov.uk/pubs/other/fincap_delivering.pdf

Corresponding author: Pallavi Seth can be contacted at: pallavi.seth@bimtech.ac.in