Nov 13, 2022

RESEARCH
ARTICLE

By

Abdul Rehman Azhar

TITLE
The Mediating Role of
Ineffective Portfolio
Management in the Relationship
between Financial Literacy and
Investment Decision
The Mediating Role of Ineffective
Portfolio Management in the
Relationship between Financial
Literacy and Investment Decision
INTRODUCTION
Investment decision is a very comprehensive process of decision making regarding
a certain investment. The investment is basically defined as “expenditure made
now to make gains in future” (Avram et al., 2009). Investment decisions are
basically made in order to invest resources in a particular asset or portfolio which
would be particularly promising in generating fruitful returns in future. There exist
three major determinants of an investment decision which involves the anticipated
profitability, expenditure required and the finances that are available to the investor
(Harcourt et al., 1967). Therefore, the investment decision is directly dependent
upon several factors that the investor must know, interpret, analyze, anticipate, and
capitalize efficiently. After gathering, interpreting, measuring and analyzing all
the available information, the investor will majorly go for an investment that leads
towards the most rational and fruitful decision for their own benefit in future
(Pompian, 2006).

Mason & Wilson in Krisna and Suthapa (2010) state that financial literacy is
basically the knowledge, acquaintance of basic and fundamental skills, and
interpretation of reliable information by catering maximum risk associated with a
particular investment. Hence, financial literacy plays a vital role in minimizing the
risk and maximizing the returns for a given investment opportunity. Widayat
(2010) states that financial literacy itself varies with varying demographic factors
and investment decisions also vary with varying economic situation of the country
and level of financial literacy that persists within the population. It is observed that
financial literacy varies by various demographic aspects like age, gender, income
levels, and education. Furthermore, the investment decisions then depend upon
level of financial awareness, knowledge and skills among the populous and the
situation of economic indicators that define the state of economy. Cristanti and
Mahastanti (2011) state that the age factor plays a greater role in making
investment decisions, for instance, the investors who are close retirement are more
keen in fruitful investment opportunities as compared to the new generations and
they also show that gender role is also significant as men are more keen and active
in gaining financial awareness and making frequent financial investment decisions.

Financial literacy is basically described as the financial awareness, knowledge, and

skills regarding fundamental financial and economic phenomena in order to be
capable of allocating and utilizing the financial resources effectively and
efficiently (Kumari, 2020). As we know that in today‟s world the economies and
financial markets have become enormously complex, it is a dire need of the time
that every individual must be well equipped with financial knowledge and
awareness in order to manage his/her finances, investments, spending etc. It is
observed that this dire need can be fulfilled if the populous starts to gain financial
literacy while acquiring the crucial knowledge of investing, budgeting, saving,
cash management, asset management, and spending effectively and efficiently
(Seth, Patel & Krishnan 2011). As the systems and methodologies of today‟s
economy has become complex, the chances for crime detection and loopholes has
also become complicated. The less financial literacy rate among the individuals
can also lead to investors facing frauds, corruption, theft, and unfruitful decision
making due to the lack of prudence, diligence and proper planning (Kashif Arif,
2015). Researchers have come to the conclusion that there is an impact of financial
literacy leading to selection of less diversified portfolios which urges the gap for
studying the mediating role of portfolio management in the relationship between
financial literacy and investment decisions upon which very little research has been
conducted so far (Fedorova, Nekhaenko, & Dovzhenko, 2015). Researchers also
strongly believe that the role of portfolio management must be thoroughly studied
in order to understand better the shortcomings that are posed by poor portfolio
management by investors due to lack of financial literacy in accordance with
several demographic aspects. Moreover, the variables such as the risk adjusted
performance and portfolio performance might also be investigated in order to
precisely anticipate their effects on investment decisions (Nasrullah Hamza
&Imtiaz Arif, 2019).
It can be observed from literature that the mediating role of several different
factors in the relationship between financial literacy and investment decisions has
been comprehended and analyzed like effects of big five personality traits
(Nasrullah Hamza &Imtiaz Arif, 2019), risk perception (Haseeb Waheed, Zeeshan
Ahmed, Qasim Saleem, Sajid Mohy Ul Din,& Bilal Ahmed, 2020). Hence, there
persists a vague aperture regarding the mediating role of portfolio management in
the relationship between financial literacy and investment decisions.
References:
1. Avram E. L. et al. (2009) Investment decision and its appraisal, DAAAM International,
Vienna, Austria, EU, 2009, Vol. 20, No. 1, p. 1905-1906
2. Harcourt, G.C. et al. (1967) Economic Activity, Cambridge University Press, New York,
Re-issued in this digitally printed version 2008
3. Pompian, Michael. M. (2006). Behavioral Finance and Wealth Management. New.
4. Bernheim, B.D., Garrett, D.M., & Maki, D.M. (2001). Education and Saving: The
LongTerm Effects of High School Financial Curriculum Mandates. Journal of Public,
Economics, 80 (June): 436–466.
5. Widayat (2010) Penentu Perilaku Berinvestasi. Jurnal Ekonomika-Bisnis,Vol. 01 No.02,
111-128
6. Christanti, N dan Mahastanti, L.A. (2011). Faktor-faktor yang Dipertimbangkan Investor
dalam Melakukan Investasi. Jurnal Manajemen Teori dan Terapan, Volume 4 No. 3,
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Special Reference to Undergraduates in Western Province, Sri Lanka. Asian Journal of
Contemporary Education, 4(2), 110-126.
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Indian Investors‟ -A Case of Delhi & NCR
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11. Fedorova, E. A. e., Nekhaenko, V. V., & Dovzhenko, S. E. e. (2015). Impact of financial
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12. Hamza, N., & Arif, I. (2019). Impact of financial literacy on investment decisions: The
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mediating role of risk perception in the relationship between financial literacy and
investment decision. International Journal of Innovation, Creativity and Change, 14(4),
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