Financial Literacy and Mutual Fund Investment Decisions in Urban India

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.