Financial Literacy and Mutual Fund Investment Decisions in Urban India

Abstract

The current study attempts to explore the effects of financial literacy on the investment decision of investors towards 
mutual funds in Indian cities. Financial literacy has been defined as a multivariate concept encompassing the 
dimensions of financial knowledge, financial attitude, and financial behaviour with each dimension having an 
individual and collective effect on the decision-making process. The growth in the mutual fund industry along with 
the active participation of investors has been observed due to technological advancements but there exists a wide gap 
between the supply and use of financial products for personal gains. The current study employs a descriptive-analytical 
method where the study is based on primary data from 110 respondents selected from Indian cities through 
questionnaires. The analysis uses Pearson Product Moment Correlation Coefficient, One Way ANOVA, and Chi
Square test of independence. The results indicate a highly significant positive relationship between financial literacy 
and investment decision quality (r = 0.724, p < 0.001) where financial literacy explains about 52.4% of the variance 
in investment decision quality scores. Income acts as a significant distinguishing factor of investment behaviour 
among individuals (F = 4.58, p = 0.0047), while educational qualification alone does not significantly predict mutual 
fund investments (χ² = 1.821, p = 0.611). Investment decisions show substantial dependence on past returns and social 
cues from the family and peer group, implying a tendency to chase returns and social herding. This paper finds that 
improvement in financial literacy is a prerequisite but not enough to improve investment decision quality among urban 
Indians, and that any program needs to address both dimensions simultaneously.