Academic journal article IUP Journal of Applied Finance

Reading Habit and Household Investment in Risky Assets

Academic journal article IUP Journal of Applied Finance

Reading Habit and Household Investment in Risky Assets

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

The Indian economy is growing at a healthy rate and has been attracting a very good amount of foreign investments ever since economic reforms commenced in the early 1990s. The rapid changes taking place in the financial markets due to financial sector reforms, the proliferation and complexity of investment products, and the number of financial scams reported during the last decade-and-a-half, calls for more information on personal finance. If the households have insufficient knowledge regarding the saving process, they are unlikely to be able to make optimal investments. Lack of financial knowledge may result in households saving too little and too late in life to reach their various life cycle goals in general and their retirement goals in particular. This will result in their inability to achieve the desired balance between consumption while working and consumption on retirement. Additionally, lack of information regarding the risk-return distribution of various investment options might lead households to have lopsided investment portfolios.

Many financial assets are available in the form of bank fixed deposits, government and corporate fixed income securities, mutual fund units, common stocks, provident and pension funds, insurance, home, real estate, gold, etc. Each asset has a different rate of return, risk and liquidity.

Every individual's need differs from others' and hence the investment patterns may also differ accordingly. Therefore, there might be varying degrees of preferences for different investment vehicles among the households. Every household tends to keep some cash balance and maintain certain amount in the form of bank deposits to meet its transaction and precautionary needs. In the case of salaried class, contributions to employee provident and pension funds are more or less compulsory due to the legislative bindings on the employers. Life insurance covers the household to meet situations arising out of untimely death of the breadwinner. The surplus income above these needs awaits investment in competing financial and non-financial assets.

As shown in Table 1, the household sector has accounted for 69% of Gross Domestic Savings (GDS) during 2005-06. This figure was as high as 93% in the year 2001-02. On an average, savings in financial assets and physical assets have contributed equally to total savings by the household sector.

Table 2 exhibits the allocation of investments to various financial instruments. Bank deposits have dominated the financial assets of the household sector. This can be interpreted as lack of sophistication in personal financial management by the Indian household sector.

Traditionally, investment preferences of households were explained in terms of demographic and economic factors. Bodie and Crane (1997), Banks and Smith (1999), Guiso and Jappelli (1999), and Mukhopadhyay (2004) showed that age had an impact on the ownership of risky assets. Alessie et al. (1999) and Hochguertel et al. (1997) showed that income had a positive and significant impact on ownership of risky assets.

Hochguertel et al. (1997), Shanmugham and Muthusamy (1998), Guiso and Jappelli (1999), and Banks and Smith (1999) showed that education had a significant impact on ownership of risky assets.

Agell and Edin (1990), Shanmugham and Muthusamy (1998), and Alessie et al. (1999) showed that occupation had a positive and significant impact on ownership of risky assets.

According to Hochguertel et al. (1997), Banks and Smith (1999), and Poterba and Samwick (1999), tax had a significant impact on tax-preferred saving products. Alessie et al. (1999) found that household composition had a negative and statistically significant impact on the ownership and proportion of investments in shares. Yilmazer (2001) showed that the probability that a household owns a home increases with each additional child, while their share of investment in stocks decreases with an increase in the number of children. …

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