The Impact of Financial Literacy on Investment Decisions: The Mediating Roles of Investment Strategy and Risk Management

Abstract

Financial literacy is one of the most influential factors in determining investment decisions, developing investment strategy, and managing financial risk for investors. This research paper aims to examine the effect of financial literacy on investment decisions. A quantitative cross-sectional study is carried out among individual investors and future investors in Dhaka, Bangladesh. Survey data are collected using a structured, self-administered questionnaire through offline and online surveys. Reliability, convergent validity, discriminant validity, structural relationships, and mediating effects have been tested in accordance with the standard PLS-SEM methods. The findings of the study show that financial literacy has a highly significant direct influence on investment decisions. Similarly, Financial literacy also has a highly significant effect on investment strategy and risk management. Investment strategy and risk management have significant and positive impact on the investment decision. Mediating effect analysis has found highly significant indirect influence through investment strategy and risk management suggesting that better financial education and risk management techniques can help individual investors make better investment decisions. The findings of the study will help the policymakers and financial regulators to adopt the target financial literacy program to enhance the financial knowledge of the investors that will help the investors to take the improved and prudent financial decisions.