DJAME Journal Issue02

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Determinants of Financial Risk Tolerance and its inﬂuence on Investment

decisions
Article · September 2020
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Suyam Praba
Hindusthan College of Engineering and Technology
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Volume - I Issue - 2 December 2019
 
DJAME Journal of
Management Research
(Bi-annual)
Excellence Breeds Excellence

Vol I / Issue 2 / December 2019
Page | 15 |
DJAME Journal of Management Research
Page | 16 |
Internal Factors
• Perception
• Memory Investment
• Learning
• Attitude
Decision Making
• Motivations Process
• Emotions
H1
Problem Recognition
H4
Financial Risk
Tolerance
Information
Search
H2
Pre –Investment
External Factors Economic Factors alternative evaluation
• Culture • Income
• Demographics • Savings
• Financial Investment
• Geographics
• Families & Dependency
Households • Earning members
• Reference groups in Family
• Marketing • Socioeconomic
Activities class
Page | 17 |
RESEARCH MODEL ON DETERMINANTS OF FINANCIAL RISK TOLERANCE AND ITS

INFLUENCE ON INVESTMENT DECISIONS
The research model shows the factors influencing the risk tolerance profile of individual. The association
between internal factors, external factors, economic status and financial risk tolerance profile is studied
in detail in this paper. The effect of risk tolerance over investment decision making process is also
analysed. Hypotheses are framed suitably to determine the association between risk tolerance level and
its determinants.
HYPOTHESES
H1: There is no significant association between the internal factors and the risk profile of an individual.
H2: There is no significant association between the external factors and the risk profile of an individual.
H3: There is no significant association between the economic factors and the risk profile of an
individual.
H4: There is no significant association between the risk profile of an individual and their investment
decision.
ANALYSIS AND INTERPRETATION

H1: There is no significant association between the internal factors and the risk profile
of an individual.
Internal factors included for the study are perception, learning, memory, motive, personality, emotions,
and attitude related to Investment.
Table No: 1 Chi square test results showing the association between internal factors and
financial risk profile
Financial Risk
Profile
Internal Factors
Chi Sq
Sig Value
value
Perception on Loan for Investment 0.171 21.195
Perceived future income 0.446 16.104
Perception
Perceived Income Post retirement 0.574 14.332
Comfortable risk/return for Investment avenue 0.067 30.188
Most preferred Investment avenue 0.264 27.896
Learning
Reason for preference of Investment avenue 0.503 15.302
Page | 18 |
Parents’ conversations about money 0.307 18.302

Parents advised how to invest 0.191 20.683
Memory (Childhood)
Teachers taught about investment 0.449 16.054
Age when first Investment was made 0.909 12.199
Motives Investment Tenure 0.147 21.884
Personality Borrowing habit to meet your expense 0.008* 32.85
Chi square test is performed between internal factors and risk tolerance profile and the results are shown
in the table no: 1. Since the p value is greater than 0.05, it is concluded that there is no significant
association between perception towards investment and risk profile, learning about investment and
risk profile, childhood memory about investment details and risk profile, investment motive and risk
profile. The results indicate there is significant association between borrowing habit to meet expenses
and financial risk profile of an individual which is shown in table no: 2.
Table No: 2 Association between borrowing habit to meet expenses and financial risk
profile
Risk tolerance Profile
Borrowing habit to
Low Below Above High Total
meet expenses Average
Tolerance Average Average Tolerance
No 0 0 5 5 3 13
Very Often
% 0.0% 0.0% 38.5% 38.5% 23.1% 100%
No 0 3 12 8 5 28
Often
% 0.0% 10.7% 42.9% 28.6% 17.9% 100%
No 1 8 34 42 16 101
Some Times
% 1.0% 7.9% 33.7% 41.6% 15.8% 100%
No 1 8 41 39 22 111
Rarely
% 0.9% 7.2% 36.9% 35.1% 19.8% 100%
No 0 8 72 19 11 110
Never
% 0.0% 7.3% 65.5% 17.3% 10.0% 100%
No 2 27 164 113 57 363
Total
% 0.6% 7.4% 45.2% 31.1% 15.7% 100%
From the Table No: 1, we infer that the p value is 0.008 is lesser than the 0.05 hence the null is rejected.
Therefore, there is significant relationship between borrowing habit to meet expenses and risk tolerance
profile. From the table no: 2, we infer that 23.1% of respondents who borrow very often fall under high
risk tolerance profile category. 41.6% of those who borrow sometime fall under average risk tolerance
profile category. 36.9% of those who borrow rarely to meet their expenses and 36.9% who never borrow
to meet their expense fall under average risk tolerance profile category.
Page | 19 |
H2: There is no significant association between the external factors and the risk profile
of an individual.
External factors include culture, sub culture, demographic factors like age, gender, education, marital
status, life stage, occupation (industry) and work experience, reference group and family/households.
Their association with financial risk tolerance is analyzed and the chi square test results are illustrated in
table no: 3. It is inferred from the below table that p value of mother tongue and gender is lesser than 0.05
(5% level of significance), hence there is association between mother tongue and financial risk tolerance
and also between gender and financial risk tolerance, which is explained in table no: 3 and 4.
Table No: 3 Chi square test results showing the association between external factors and
financial risk profile
Financial Risk Profile
External Factors
Sig Value Chi Sq value
Culture Religion 0.064 20.192
Sub Culture Mother tongue 0.018* 35.410
Age group 0.914 6.050
Gender 0.001* 18.765
Educational
0.872 13.116
Qualification
Demographics
Marital status 0.120 17.866
Current Life stage 0.121 22.753
Occupation (Industry) 0.234 28.645
Work Experience 0.486 19.554
Most influential
Reference group person for Investment 0.058 30.769
decisions
Family & Households Family type 0.108 13.100
Table No: 4 Association between Mother Tongue and Risk tolerance Profile
Mother Tongue Low Below Above High Total
Average
No 0 20 125 87 48 280
Tamil
% 0.0% 7.1% 44.6% 31.1% 17.1% 100%
No 0 6 22 13 6 47
Telugu
% 0.0% 12.8% 46.8% 27.7% 12.8% 100%

No 0 1 7 5 4 17
Kannada
% 0.0% 5.9% 41.2% 29.4% 23.5% 100%
Page | 20 |
No 1 3 25 14 3 46
Malayalam
% 2.2% 6.5% 54.3% 30.4% 6.5% 100%
No 0 1 1 2 0 4
Hindi
% 0.0% 25.0% 25.0% 50.0% 0.0% 100%
No 1 0 4 6 0 11
Others
% 9.1% 0.0% 36.4% 54.5% 0.0% 100%
No 2 31 184 127 61 405
Total
% 0.5% 7.7% 45.4% 31.4% 15.1% 100%
From the Table No: 4, we infer that 23.5% of respondents whose mother tongue is Kannada fall under
high risk tolerance category. 30.4% of respondents whose mother tongue is Malayalam and 50% of
respondents whose mother tongue is Hindi fall under above average risk tolerance profile category.
44.6% of respondents whose mother tongue is Tamil and 27.7% of respondents whose mother tongue is
Telugu fall under average risk tolerance profile category.
Table No: 5 Association between Gender and Financial Risk tolerance Profile
Gender Low Below Above High
Average Total
No 2 14 91 84 45 236
Male
% 0.8% 5.9% 38.6% 35.6% 19.1% 100%
No 0 17 93 43 16 169
Female
% 0.0% 10.1% 55.0% 25.4% 9.5% 100%
No 2 31 184 127 61 405
Total
% 0.5% 7.7% 45.4% 31.4% 15.1% 100%
From the Table No: 3, we infer that the p value is 0.001 is lesser than the 0.005 (5% level of significance)
hence the null is rejected. Therefore there is significant association between gender and risk tolerance
profile. From the Table No: 5, we infer that 19.1% of male respondents fall under high risk tolerance
profile category, whereas 55.0% of female respondents fall under average risk tolerance profile category.
Hence it is clearly evident from the above table that men are high risk tolerant than women.
H3: There is no significant association between the economic factors and the risk profile
of an Individual.
The economic status of an individual wherein individual annual income, annual family income, annual
savings, income-expenditure ratio, number of earning members in a family, number of financial
dependents in family, socio-economic status (as per NCEAR classification) and its association with
financial risk tolerance level is studied using Chi square test.
Page | 21 |
Table No: 6 Chi square test results showing the association between economic status of
Individual and their financial risk profile
Risk Profile
Economic Status of Individual
Individual Annual Income 0.831 17.392
Family Annual Income 0.640 17.205
Individual Annual Savings 0.726 12.257
No. of earning members in family 0.012* 42.271
Financial Dependency 0.767 8.229
Socio Economic Classification (SEC) 0.505 15.268
From the above Chi square test results, we infer from the Table No.6 that p value of individual annual
income, family annual income, individual annual savings, financial dependency and socio-economic
class, is greater than 0.05 (5% level of significance), hence there is no association between these and
their risk profile. Whereas the chi square test results between number of earning members in a family and
financial risk tolerance shows that p value is 0.012 which is lesser than 0.05 (5% level of significance),
hence it is concluded that there is association between risk profile and number of earning members in a
family which is shown in the table no:7.
Table No: 7 Association between Risk Profile and Number of earning members in a family
Risk profile
No. of earning
Low Below Above High Total
members in family Average
tolerance average average tolerance
No 1 5 46 39 18 109
1
% 0.9% 4.6% 42.2% 35.8% 16.5% 100%
No 0 20 103 65 31 219
2
% 0.0% 9.1% 47.0% 29.7% 14.2% 100%
No 0 5 32 13 10 60
3
% 0.0% 8.3% 53.3% 21.7% 16.7% 100%
No 1 1 1 6 1 10
4
% 10.0% 10.0% 10.0% 60.0% 10.0% 100%
No 0 0 2 3 0 5
5
% 0.0% 0.0% 40.0% 60.0% 0.0% 100%
No 0 0 0 0 1 1
6
% 0.0% 0.0% 0.0% 0.0% 100.0% 100%
No 0 0 0 1 0 1
8
% 0.0% 0.0% 0.0% 100.0% 0.0% 100%
No No 31 184 127 61 405

Total
% % 7.7% 45.4% 31.4% 15.1% 100%
From the Table No: 7 shows that 42.2% of respondents whose family have only single bread winner fall
Page | 22 |
under average risk tolerance profile category. 29.7% of respondents who have two earning members in a
family and 60% of respondents whose family have four earning members fall under above average risk
tolerance category. 100% of respondents whose family have six earning members fall under high risk
tolerance profile category. Hence it is concluded as the number of earning members in a family increases
their risk appetite also increases.
H4: There is no significant association between the risk profile of an individual and
investment decision.
The association between financial risk tolerance and the investment decision making process is studied
using Chi square test. Investment decision making process involves various stages like problem
recognition, pre- investment alternative evaluation, investment and post investment analysis.
Table No: 8 Chi square test results showing the association between Investment decision
making process and financial risk profile
Risk Profile
Investment decision making process
Encouraging factor for
Problem recognition 0.010* 37.543
Investment
Pre Investment Actions before
0.447 20.176
alternative evaluation Investment
Household investment
0.052 31.216
decision-maker
Investor Classification 0.393 4.097
Number of avenues
Investment 0.935 17.645
invested
Liquid Investment
for Contingency 0.817 14.254
management.
The test results are shown in the table no: 8, the p value of actions before investment, household investment
decision maker, investors’ classification, number of avenues invested is greater than 0.05, thereby we
conclude that there is no significant association between these and risk tolerance profile. Whereas the chi
square test results of encouraging factor for investment and risk tolerance profile shows the p value is
0.010, which is lesser than 0.05 (5% level of significance) hence there is a positive association between
the two.
Page | 23 |
Table No: 9 Association between risk profile and encouraging factor for Investment
Encouraging factor for Investment
Free Urge to Attractive Special
Risk Profile Advertisement Contingency Total
Money Save for Interest Schemes/
are attractive Management
available future Rates Offers
Low
No 0 0 2 0 0 0 2
Tolerance
% 0.0% 0.0% 100.0% 0.0% 0.0% 0.0% 100%
Below
No 8 2 9 0 1 7 27
Average
% 29.6% 7.4% 33.3% 0.0% 3.7% 25.9% 100%
Average No 53 5 73 18 14 7 170
% 31.2% 2.9% 42.9% 10.6% 8.2% 4.1% 100%
Above
No 29 12 49 14 4 5 113
Average
% 25.7% 10.6% 43.4% 12.4% 3.5% 4.4% 100%
High
No 17 4 24 6 3 2 56
Tolerance
% 30.4% 7.1% 42.9% 10.7% 5.4% 3.6% 100%
Total No 107 23 157 38 22 21 368
% 29.1% 6.3% 42.7% 10.3% 6.0% 5.7% 100%
From the Table No: 9 we infer that 100% of respondents who fall under low risk tolerance profile
category state that the urge to save for future is the factor encouraging for their investment. 25.9 % of
respondents who fall under below average risk tolerance profile state they invest when special schemes
or offers are available. 12.4% of above average risk tolerance category for contingency management.
31.2% of respondents with average risk and 30.4% of high risk tolerance category state that they invest
only when free money is available.
Table No: 10 Friedman’s test performed to study the investment motive among different
risk profile of respondents.
Risk profile
Investment Motive Low Below Above High
Average
tolerance average average tolerance
Mean 1.00 3.68 3.43 3.54 4.22
Child future
Rank 1 1 1 1 2
Wealth Mean 6.50 3.92 3.83 3.85 3.45

Maximisation Rank 5 2 2 2 1
Page | 24 |
Retirement Mean 4.00 4.53 4.44 3.98 4.32

planning Rank 2 3 3 3 3
Mean 5.50 4.92 5.66 5.35 5.39
Tax planning
Rank 3 4 4 4 4
Secure one’s Mean 6.50 6.29 6.38 6.57 6.80
own future Rank 8 7 5 5 7
Contingency Mean 6.50 6.76 6.90 6.72 6.48
management Rank 6 8 9 6 5
Protect from Mean 5.50 6.23 6.77 6.96 7.14
liability Rank 4 6 7 8 9
Pass on Mean 6.50 6.21 6.67 7.07 6.82
wealth to next
Rank 7 5 6 9 8
generation
Protect one’s Mean 8.50 6.76 6.84 6.95 6.67
health Rank 11 9 8 7 6
Social well Mean 7.50 7.74 7.23 7.18 7.18
being Rank 9 10 10 10 10
Inflation Mean 8.00 8.97 7.88 7.89 7.56
management Rank 10 11 11 11 11
Mean 12.00 12.00 11.98 11.93 11.98
Others
Rank 12 12 12 12 12
Chi-Square 11.69 141.30 769.96 548.01 247.17
Asymp. Sig. 0.387 0.00 0.00 0.00 0.00
From the table no:9, we infer that Friedman’s test shows the chi square test value of investment motive
and financial risk tolerance level, the p value of low risk tolerance profile is 0.387 which is greater than
0.05, while others have 0.00 which is lesser than 0.05 (5% level of significance) Hence we conclude that
except for the low risk tolerance profile, others shows positive association towards investment motive.
Child future is the first investment motive for all risk profile except for high risk tolerance profile.
Wealth maximization is first motive for high risk tolerance and it is the second motive among all risk
profile except for low risk tolerance level. Retirement planning is second investment motive for low risk
tolerance profile while it is the third motive for rest of the risk profile group.
Page | 25 |
Table No: 11 Friedman’s test performed to study the most preferred investment avenue
among different risk profile of respondents.
Risk Profile
Preferred Investment
Low Below Above High
Avenue Average
Mean 3.00 2.55 2.51 2.97 2.74
Deposit
Rank 3 1 1 3 1
Mean 2.50 2.68 2.80 2.91 2.80
Property
Rank 2 3 2 2 2
Mean 3.00 2.65 2.92 2.88 2.95
Gold
Rank 4 2 3 1 3
Mean 1.50 3.35 3.64 3.00 3.33
Insurance
Rank 1 4 4 4 4
Mean 5.50 4.26 4.28 4.23 4.26
Shares / MF
Rank 5 5 5 5 5
PF/PPF/ Mean 5.50 5.52 5.04 5.16 4.98
NSC Rank 6 6 6 6 6
Mean 7.00 7.00 6.80 6.86 6.93
Others
Rank 7 7 7 7 7
Chi Square 10.29 116.07 549.37 383.00 185.94
Asymp. Sig. 0.11 0.00 0.00 0.00 0.00
The table no: 11, Friedman’s test shows the chi square value of most preferred investment avenue and
financial risk tolerance level, the p value of low risk tolerance profile is 0.11 which is greater than
0.05, while others have 0.00 which is lesser than 0.05 (5% level of significance) Hence we conclude
that except for the low risk tolerance profile, others shows positive association towards most preferred
investment avenue. Deposit is ranked as first most preferred investment avenue for below average,
average and high risk tolerance profile. Low risk tolerance profile prefers insurance the most, and above
average risk profile prefers gold investment the most.
Table No: 12 Percentage analysis of the Investment pattern in various Investment avenues
among different risk profile of respondents.
Investment pattern in various Investment avenues

Risk profile Total
MF/ PF/
Deposit Gold Property Insurance Others
Shares PPF
High No 31 37 23 35 22 35 2 185
tolerance % 17% 20% 12% 19% 12% 19% 1% 100%
Above No 72 63 49 78 40 52 9 363
average % 20% 17% 13% 21% 11% 14% 2% 100%
Page | 26 |
No 117 91 83 107 61 89 12 560

Average
% 21% 16% 15% 19% 11% 16% 2% 100%
Below No 17 15 14 14 5 14 2 81
average % 21% 19% 17% 17% 6% 17% 2% 100%
Low No 1 1 1 2 1 2 8
tolerance % 13% 13% 13% 25% 13% 25% 0% 100%
No 238 207 170 236 129 192 25 1197
Total
% 20% 17% 14% 20% 11% 16% 2% 100%
The actual investment made by different financial risk tolerance groups in different investment avenue
is illustrated in the table no: 12. High risk tolerance profile investors have invested 20% of their total
investment in gold . While above average, average risk and below average risk investors have their major
portion of investment in deposit. While low risk tolerance profiles have invested 25% of their portfolio
in insurance.
FINDINGS AND DISCUSSION

There is significant association between borrowing habit to meet expenses and risk tolerance profile.
23.1% of respondents who borrow very often fall under high risk tolerance profile category.
There is significant association between mother tongue and risk tolerance profile. Kannada speaking
respondents are high risk tolerant, Malayalam and Hindi speaking respondents are above average risk
takers, while Tamil and Telugu speaking respondents are average risk takers.
There is significant association between gender and risk tolerance profile. 19.1% of male respondents
fall under high risk tolerance profile category, whereas 55.0% of female respondents fall under average
risk tolerance profile category. Hence it is clearly evident from the above table that men are high risk
tolerant than women.
42.2% of respondents whose family have only single bread winner fall under average risk tolerance profile
category. 29.7% of respondents who have two earning members in a family and 60% of respondents
whose family have four earning members fall under above average risk tolerance category. 100% of
respondents whose family have six earning members fall under high risk tolerance profile category.
Hence it is found that the number of earning members in a family increases their risk appetite also
increases.
100% of respondents who fall under low risk tolerance profile category state that the urge to save for
future is the factor encouraging for their investment. 25.9 % of respondents who fall under below average
risk tolerance profile state they invest when special schemes or offers are available. 12.4% of above
average risk tolerance category for contingency management. 31.2% of respondents with average risk
and 30.4% of high risk tolerance category state that they invest only when free money is available.
Children’s future is the first investment motive for all risk profile except for high risk tolerance profile.
Page | 27 |
Page | 28 |
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See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Determinants of Financial Risk Tolerance and its inﬂuence on Investment

Article · September 2020

Investment Behaviour View project

The user has requested enhancement of the downloaded file.

Excellence Breeds Excellence

Vol I / Issue 2 / December 2019

RESEARCH MODEL ON DETERMINANTS OF FINANCIAL RISK TOLERANCE AND ITS

ANALYSIS AND INTERPRETATION

Parents’ conversations about money 0.307 18.302

% 0.0% 12.8% 46.8% 27.7% 12.8% 100%

No No 31 184 127 61 405

Wealth Mean 6.50 3.92 3.83 3.85 3.45

Retirement Mean 4.00 4.53 4.44 3.98 4.32

Investment pattern in various Investment avenues

No 117 91 83 107 61 89 12 560

FINDINGS AND DISCUSSION

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