ISSN: 2091-0460 ManagementVol 26, No.

1,Vol
Dynamics, 2023
26, No 1, 2023 | 11

Financial Literacy and Investment Decisions

in Nepalese Share Market
Dhruba Prasad Subedi
Lecturer, Shanker Dev Campus, Tribhuvan University, Nepal.
E-mail: [email protected]

Article Info: ABSTRACT

Received: 8 Oct 2022
This study examines the role of financial literacy on the investment decisions
Revised: 13 Feb 2023
of investors in the Nepalese share market. Financial literacy is expressed in
Accepted: 04 Apr 2023 personal saving, risk tolerance, investment options, and financial knowledge.
DOI: The data were collected through a structured questionnaire using the
https://doi.org/10.31 convenience sampling method from 384 respondents of Kathmandu Valley.
26/md.v26i1.59147 Pearson correlation and multiple regression analysis have been used to
analyze data. The study results revealed a positive and significant relationship
Keywords:
between the dimensions of financial literacy and investment decisions in the
Financial knowledge,
Nepalese share market. Low financial literacy and lack of financial information
Financial awareness,
affect the ability to save and make sound financial decisions. Ignorance of basic
Risk tolerance behavior,
financial concepts results in negative behavior in saving and investment
Investment options,
decisions. The study suggests conducting financial education programs to
Investment decision.
help improve investors’ savings and financial decisions.

1. INTRODUCTION
Financial literacy has recently drawn the attention of researchers, policymakers,
investors, and financial institutions (Lusardi, 2019; Kumari, 2020). Nowadays, the capability of
managing and developing personal financial status is an important issue. People must make
long-term plans for their investments in retirement and their children’s education. They must
also decide on short-term borrowing and saving for vacations, education, emergencies, houses,
cars, and other expenses. Additionally, they must manage the finances for their medical and life
insurance needs (Chen & Volpe, 1998). Financial literacy is a basic concept that supports
understanding the value of money and its use in daily life. This includes managing the incomes
and expenditures of the people and making investments in the suitable sector for their future
benefits. It also incorporates understanding everyday situations, such as savings, borrowings,
credit, and insurance (Singh & Kumar, 2017; Roy & Jane, 2018). Understanding financial terms
and concepts is key to investing and managing funds, which supports increasing wealth and
security. Financial literacy develops the awareness of Individuals for borrowing and investing
money. Financial literacy is a component that develops financial skills and utilizes such financial
knowledge and understanding to make beneficial financial decisions (Wagland & Taylor, 2009;
Kumari & Ferdous, 2019).
Financial decision-making ability can be enhanced through financial literacy, which
supports the development of an individual’s ability and utilizes knowledge and skills. The main
objective of financial literacy is to assess and manage long-term financial resources for the
financial wellness of the investors (Arora, 2016). OECD (2011) mentioned that financial literacy
ISSN: 2091-0460 Financial Literacy and Investment Decision … | 12
supports developing the concepts, knowledge, and skills about financial products and
developing the ability and skill to analyze opportunities and financial risk. It is a supporting tool
for making rational financial decisions and taking dynamic actions, which ultimately supports
the financial wellness of the investors in the competitive environment. Financial literacy is
essential for choosing the right project. Financial literacy is essential to an individual for
acquiring financial skills and knowledge, which improves the ability to make rational investment
decisions (Adams & Rau, 2022).
Financial literacy also makes understanding how money works and how to manage and
invest. Developing skills and knowledge empowers people to use their available financial
resources to make rational, efficient, and appropriate financial decisions. Financial literacy and
financial inclusion are seen as related issues. Financial literacy is related to financial knowledge
for making financial decisions. In contrast, financial inclusion concerns the availability and
provision of financial products and services that meet an individual’s demand (Finke & Huston,
2017).
Financial literacy is a financial tool that prepares individuals to develop the financial
knowledge, skills, and capabilities that support developing strategies to mitigate financial risk.
Additionally, it may be used to enforce actions like avoiding debt and making sure that invoices
are paid on time, which aids customers in maintaining their access to loans in the competitive
credit markets. Financially literate people understand the fundamentals of money and assets;
they are educated, informed, and aware of matters about assets, taxes, insurance, banking,
investments, and money management (Semercioglu & Akcay 2016). They apply their financial
knowledge and skills to understand financial situations and plan financial decisions (Gachango,
2014).
Financial literacy is still a fascinating topic in both rich and developing countries, and it
has attracted a lot of attention lately, given how quickly the financial environment is changing.
Atkinson et al. (2007) mentioned that financial literacy concerns understanding financial
products and concepts and their ability and skills to analyze financial risks and opportunities in
a dynamic environment. By educating and empowering investors, financial literacy enables them
to utilize their understanding of finance to assess goods and make investment decisions relevant
to their business (Thapa & KC, 2020). More financial expertise is anticipated to aid in overcoming
current challenges in advanced credit markets.
Investment decision-making is the skill of managing challenging circumstances when
making investments in specific sectors. In this investment decision process, individuals choose
the most suitable investment option and analyze alternative scenarios. People may not make
rational investment decisions based on their available resources. Thus, financial literacy is a part
of investment decisions that supports selecting the most appropriate investment opportunities.
Suitable investment decisions make the life of investors prosperous (Raut, 2020). The investment
decision is affected by the rate of return, risk tolerance behavior of investors, and various market
situations. Investors cannot make rational financial decisions; sometimes, they are influenced by
different factors to make biased financial decisions. Behavioral finance is an important discipline
that analyses investors’ behavior in making different financial decisions (Yusnita et al., 2022).
Investment decisions are also affected by behavioral factors of the investors, like overconfidence
or optimistic and pessimistic behavior of the investor (Breuer et al., 2014). Such factors, as well
as financial literacy, could affect the investment decisions of individuals and corporations (Ayaa
et al., 2022).
Over the past 20 years, the financial system of Nepal has become wider, and the number
and type of financial intermediaries have grown rapidly. The education and knowledge
regarding investment and saving have created hurdles like losing hard earnings. The restrictions
on individual investors by several directives also prevent them from freely playing in the market
with different opportunities. Literacy levels help an individual make wise saving and investment
decisions. Financial education programs help to improve investors’ saving and financial decision
behaviors, but much more can be done to improve the effectiveness of these programs (Lusardi
& Mitchell, 2017). Therefore, this study examines the current status of financial literacy and
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investment patterns of investors in the Nepalese share market. The paper also attempts to
analyze the impact of financial literacy on investment decisions in the Nepalese share market.

2. LITERATURE REVIEW
Financial literacy encompasses an individual’s comprehension of financial principles and
ability to use that knowledge skillfully to make prudent and accountable financial choices
(Arianti, 2022). Behavioral finance theory acknowledges that individuals may not always behave
rationally in financial matters due to cognitive biases and emotions. The theories of financial
literacy theory argue that investors with a high level of knowledge and skills regarding
investment decisions can analyze the rationality of financial products and services. The dual-
process theories mention that the investors’ thinking styles and decision-making capabilities are
based on intuition and cognition. The theories embrace the idea that investment decisions are led
by both the intuitive and cognitive processes of the investors (Idowu, 2010).
Financial literacy can counter these biases by enabling individuals to think critically,
analyze information, and make logical financial choices. A number of factors like creating and
maintaining a budget; understanding of saving and investing; knowledge about different types
of debts, interest rates, and how to manage debt responsibly is essential for avoiding financial
pitfalls; knowing how credit scores work, the importance of good credit, and how to build and
maintain a positive credit history are essential aspects of financial literacy; understanding
banking products, such as checking and savings accounts, certificates of deposit, and other
financial services, helps individuals manage their money efficiently; knowledge of various
insurance types, including health, life, home, and auto insurance, enables individuals to protect
themselves and their assets from unforeseen events; understanding the basics of taxation, such
as filing tax returns, deductions, credits, and tax implications of various financial decisions, is
vital for financial planning; aware of retirement options, such as employer-sponsored retirement
plans; setting clear financial goals and developing a plan to achieve them is a crucial part of
financial literacy; understanding risk and how it relates to investments, financial decisions, and
overall financial well-being is essential; and having a basic understanding of economic concepts
like inflation, interest rates, and the overall economic environment helps individuals make better
financial decisions. These factors can broadly be clustered into personal saving, risk tolerance
level, investment options, and financial knowledge. Thus, the study incorporates these four
variables in its research framework.
Personal saving and investment decision
Personal saving plays a crucial role in influencing personal investment decisions.
Personal savings provide the initial capital required for investment activities (Kapoor et al., 2017).
Whether investing in stocks, real estate, bonds, or starting a business, saving funds allows
individuals to participate in these ventures (Arianti, 2022). A sufficient emergency fund from
personal savings can give individuals peace of mind when investing (Gachango, 2014). They
know they have a financial cushion to handle unexpected expenses, reducing the need to
liquidate investments prematurely. The saving and borrowing behavior of the investor could be
the predictor of investment decisions (Chaulagain, 2017; Viantara et al., 2019). Based on this
evidence, the following hypothesis was formulated.
H1: Personal saving has a significant effect on investment decision-making.
Risk tolerance level and investment decision
Risk tolerance refers to an individual’s ability and willingness to take on risk in their
investment decisions. Various factors influence it, including financial goals, investment time
horizon, personal circumstances, and psychological traits. The concept of risk tolerance aids
individuals in comprehending the degree of risk inherent in investments. It assists in cultivating
the capacity to endure and align prevailing risks with investment objectives. The level of risk an
individual is willing to bear aligns with the anticipated future rate of return. The influence of risk
tolerance extends to shaping investors’ decisions when selecting alternative investment options
ISSN: 2091-0460 Financial Literacy and Investment Decision … | 14
(Awais et al., 2016; Pak & Mahmood, 2015; Snelbecker et al., 1990). Individuals possessing a high-
risk tolerance are inclined to confidently invest in high-risk assets, whereas those with a lower
risk tolerance tend to shy away from such ventures (Corter & Chen, 2006; Nguyen et al., 2016;
Pompian, 2012). Based on this evidence, the following hypothesis was formulated.
H2: Risk tolerance has a significant effect on investment decision-making.
Investment options and investment decision
Certain individuals often form a significant preference for specific investment options
(Pak & Mahmood, 2015; Snelbecker et al., 1990) simply due to their familiarity with them. This
leads them to believe that they possess a greater understanding of these investment options or
have gained expertise in dealing with such investments, resulting in feelings of ease and
assurance. This familiarity with investments can also stem from previous personal encounters or
be influenced by the financial experiences of their parents or other relatives. Elevated levels of
financial literacy are associated with greater engagement in the stock market (Christelis et al.,
2010; Van Rooij et al., 2011; Yoong, 2011), increased participation in private retirement savings
(Bucher-Koenen & Lusardi, 2011), enhanced portfolio diversification, and augmented
accumulation of wealth (Lusardi & Mitchell, 2007). Based on this evidence, the following
hypothesis was formulated.
H3: Literacy on investment options has a significant effect on investment decision-making.
Financial knowledge and investment decision
The term “knowledge” pertains to an individual’s comprehension level concerning
matters related to personal finance. This comprehension is assessed based on their understanding
of various personal finance subjects. According to Liebi (2020), financial knowledge is a
fundamental conceptual aspect of financial literacy. Proficiency in individual financial
knowledge is also essential to avoid financial difficulties. Such challenges can arise from errors
in financial management, including inadequate financial planning and fluctuations in income.
Having a solid foundation in financial knowledge, or financial literacy, holds significant
importance when making informed investment choices. Musundi (2014) revealed that financial
literacy is significantly associated with investment decisions. Financial knowledge helps people
make wise investment decisions (Neupane, 2021). An individual’s financial knowledge
significantly influences investment decisions (Mugo, 2016). Mugo (2016) revealed a significant
positive relationship between financial knowledge and investment decisions. Based on this
evidence, the following hypothesis was formulated.
H4: Financial knowledge has a significant effect on investment decision-making.

3. RESEARCH METHODS
This study employs a causal-comparative research design. The investors who have traded
in the Nepal Stock Exchange (NEPSE) and invested their money in the share capital of the
companies are the population of the study. The number of individual investors who invest in the
Nepalese share market is unknown. If the population size is unknown, the sample size was
determined, i.e., 384 (Godden, 2004). The respondents were selected using a random sampling
method. Primary data were collected from the respondents using a structured questionnaire. The
questionnaires were distributed on personal visits through e-mail and social media apps.
Table 1
Reliability Statistics
Variable Cronbach’s Alpha No. of items
Personal Saving 0.738 5
Risk Tolerance Level 0.837 5
Investment Options 0.712 5
Financial Knowledge 0.911 5
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The study is based on primary data collected through structured questionnaires. The first
section of the structured questionnaire represents the demographic profile of the respondents,
such as gender, age, marital status, academic qualification, monthly income, income used for
investment, and frequencies of investment. The second part of the questionnaire measures the
personal saving, risk tolerance behavior, investment options, and financial knowledge of the
investors who invest in the Nepalese share market. A 5-point Likert scale has been used to
measure the level of agreement on different dimensions of financial literacy and investment
decisions of the investors. Cronbach’s Alpha is used to measure the reliability of the data. The
Cronbach’s Alpha table shows that the value of each study variable is more than 0.7. Those values
indicate that the data is reliable and fit for further statistical tests. When all the items were
considered, the overall score of Cronbach’s Alpha was found to be 0.799.
This study investigates investment decisions in the Nepalese share market as a function
of personal saving, risk tolerance behavior, investment options, and financial knowledge. The
corresponding regression model is specified below:
ID = β0 + β1 FK+ β2 PS+β3 RTB+β4 IO+ ei
where ID = Investment Decision, PS = Personal saving, RTB= Risk tolerance behavior, IO =
Investment options, FK = Financial knowledge, β0 = The intercept (constant term), and ei =
Error term.
4. RESULTS
The research study is based in Kathmandu Valley. The study’s sample size is 384 based
on the random sampling technique. Table 2 shows the respondents’ profiles. It shows that out of
the total respondents, 71.61 percent were male, and 28.39 were female. It shows that out of the
total respondents, about half represent the age group of 35-50 years, followed by the age group
above 50. Out of the total respondents, more than two-thirds of respondents are married. Of the
total respondents, 53.39% have the academic qualification of a Bachelor’s Degree followed by a
Master’s and above degree (i.e., 44.01%). About 47% of the respondents are under a monthly
income of 50,000-70,000. The fewest respondents are from a monthly income level below 30,000.
45.57% of respondents invest their 11-20% income in the share market. The result shows that out
of the total respondents, around 50% invest their money every week, followed by 23.44% every
month.
Table 2
Respondents Profile
Demographic Variables Categories Frequency Percent
Gender Male 275 71.61
Female 109 28.39
Age Below 25 10 2.60
25-35 80 20.83
35-50 190 49.48
Above 50 104 27.09
Marital Status Married 305 79.43
Unmarried 79 20.57
Academic Qualification 10+2 Level 10 2.60
Bachelor 205 53.39
Master and above 169 44.01
Monthly Income Below 30,000 40 10.42
30,000-50,000 90 23.44
50,000-70,000 180 46.87
Above 70,000 74 19.27
Income Used for Investment Upto 10% 70 18.23
11-20% 175 45.57
21-40% 94 24.48
Above 40% 45 11.72
Table 2 Continued…
ISSN: 2091-0460 Financial Literacy and Investment Decision … | 16
Frequencies of Investment Daily 45 11.72
Weekly 190 49.48
Monthly 90 23.44
Occasionally 59 15.36
N = 384
Source: Field Survey, 2022
Table 3 shows the descriptive statistics and correlation coefficients. The mean values of
financial knowledge, personal saving, risk-taking behavior, and investment options regarding
investment decisions are 3.85, 3.93, 3.88, and 3.60, respectively. Among those variables, personal
saving is the most important variable for making an investment decision, followed by risk-taking
behavior. They assess the relationship between investment decisions and financial knowledge,
personal saving, risk-taking behavior, and investment options based on their mean values. The
results of the Pearson correlation have been presented in Table 3.
Table 3
Descriptive statistics and Correlation Coefficients
Mean SD FK PS RTB IO ID
FK 3.85 0.622 1
PS 3.93 0.556 .410** 1
RTB 3.88 0.588 .413** .492** 1
IO 3.60 0.725 .456** .687** .258** 1
ID 3.87 0.654 .313** .483** .452** .344** 1
Note. Financial knowledge (FK), Personal saving (PS), risk-taking behavior (RTB), knowledge of
investment options and (IO) investment decisions.
**Correlation is significant at the 0.01 level (2-tailed)
Source: Field survey, 2022
Table 3 shows a strong correlation (0.687) between investment options and personal
saving behaviors. A moderate correlation was found between investment decisions and personal
savings, as their correlation was 0.483. Similarly, the correlation between financial knowledge,
risk tolerance behavior, and investment options is moderate and relatively weak, 0.313, 0.452,
and 0.344, respectively. A weak correlation between investment options and risk tolerance
behavior was found, as their correlation is 0.258. Similarly, the correlation between financial
knowledge and personal savings is 0.410, which seems moderate. Table 4 shows that the
investment decisions positively correlate with the 1 percent significance level with the investors’
financial knowledge, personal saving behavior, risk tolerance behavior, and investment options.
Test of Hypothesis
The impact of independent variables on dependent variables was estimated using
multiple regression. The findings from the regression analysis for the investment decisions based
on the explanatory variables are depicted in Table 4
Table 4
Regression Results
Predictors Coefficients t-statistic p-value VIF
Constant 1.053 2.806 .006
PS .278 3.192 .002 1.299
RTB .336 2.768 .003 1.608
IO .047 .421 .0475 1.240
FK .064 .727 .004 1.868
Adj.R2 =.783 F-value =15.476 F(sig) = 0.000 D.W.= 1.92
Note. Independent variables are financial knowledge (FK), personal saving (PS), risk-taking behavior
(RTB), and knowledge of investment options (IO). The dependent variable is investment decisions.
Source: Field survey, 2022
ISSN: 2091-0460 Management Dynamics, Vol 26, No 1, 2023 | 17
The R-Square, which shows the coefficient of determination of the variables, is .797. The
R-square measures the overall fitness of the model. The result of R-Square indicates that the
model explains about 79.7% of the variability in investment decisions based on financial literacy.
This means that the model used in this study explains about 79.7% of the variation in the
dependent variable. It indicates that about 20.3% of the variations in investment decisions are
affected by other factors the model does not include.
Similarly, Table 4 shows the F-Statistics about 15.476, with a p-value of 0.000. The finding
from the F-value proves the estimated model’s validity. This figure suggests that the explanatory
variables are significantly associated with the study’s dependent variables. That is, they strongly
determine the behavior of the investment decisions. Further, the value of the Durbin-Watson
statistic is 1.92, which means that the data used in the study are free from autocorrelation. The
VIF of the model is less than ten, meaning there is no multicollinearity between the independent
variables included in the model.
The regression analysis table shows a positive and significant relationship between FK
and ID. This result is supported by the t-statistics value (t-statistics .727 and the p-value < .01).
The results can be explained as a positive increase in the investors’ financial knowledge will
increase significantly in the wise investment decisions of the investors. This result is consistent
with the findings drawn by Gachango (2014), which emphasizes the importance of financial
literacy in terms of interpreting and managing money.
It is also found from the regression analysis that there is a positive relationship between
PS, RTB, IO, and ID. The coefficient of PS is .278, which means that when there is a 1 Rs. increase
in personal savings, the investment will increase by Rs.0.278. Similarly, the coefficient of RTB is
.336, which means that when there is a 1 unit increase in risk tolerance behavior, the investment
will increase by .336 unit. Likewise, the coefficient of IO is .047, which means that when there is
a 1-unit increase in investment options, the investment will increase by .047 units. This outcome
is consistent with the findings of Finke & Huston (2017), Isomidinova and Singh (2017), and
Thapa and Nepal (2015), which showed a significant positive impact on investment decisions
with the explanatory variables of risk-taking behavior, personal saving, and investment options.
This evidence supports accepting hypotheses H1, H2, H3, and H4.

5. DISCUSSION
Financial literacy is an essential skill that may be applied in complex financial scenarios
to make rational financial decisions. This is because financially literate investors are more likely
to understand and make choices and decisions, which would lead them to avoid some egregious
mistakes and make optimal financial decisions. It supports maximizing the financial well-being
of the investors. The ultimate objective of this study was to analyze the role of financial literacy
on the investment decisions of individual investors in the Nepalese share market. The analysis
reveals that financial literacy and its dimensions used in this study, namely financial knowledge,
personal saving, risk-taking behavior, and investment options, have a strong positive and
significant impact on individual investors’ investment decisions in the Nepalese share market.
The results of the study are highly consistent with the previous results of Mwathi et al. (2017,
Mugo (2016), Fachrudin and Fachrudin (2016), Putri and Henny (2017), and Hamza and Arif
(2019). The study’s findings showed a positive and significant association between financial
knowledge and investment decisions of the investors in the Nepalese share market. The study
also strongly connected financial skills and individual investment decisions. This is because
having financial expertise helps people make wise investment decisions.
6. CONCLUSION AND IMPLICATIONS
Financial literacy is the main skill supporting wise financial decisions regarding an
individual’s financial resources. Financially literate investors analyze the scenarios and choose
the best investment options. Such financial knowledge helps to make optimal financial decisions.
Investors try to enhance their financial knowledge and skills to increase their rational investment
ISSN: 2091-0460 Financial Literacy and Investment Decision … | 18
decisions to achieve a higher return on their investment. The government, policymakers, and
financial institutions should organize workshops and seminars regarding financial education
programs to enhance investors’ financial knowledge and skills and encourage investors to invest
in productive financial sectors. Financial institutions should enhance their promotional strategies
about their products on the market so that investors can make rational investment decisions.
Hence, the awareness of financial products is essential to make an effective investment decision.

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