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

Abstract

This research paper will examine the effect of financial literacy on Investment decision. Financial literacy is one of the most influential factors in determining the investment decision and developing investment strategy and managing financial risk for the investors. A quantitative cross-sectional study was carried out among individual investors and future investors in Dhaka, Bangladesh. Survey data were collected by structured self-administrated questionnaire in offline and online surveys. For analysis of the proposed conceptual model, Partial Least Squares Structural Equation Modeling (PLS-SEM) was applied using SmartPLS 4 software. Reliability, convergent validity, discriminant validity, structural relationships, and mediating effect were tested in accordance with the standard PLS-SEM methods. Financial literacy had a highly significant direct influence on investment decision (β = 0.512, p < 0.001). Financial literacy had a highly significant effect on investment strategy (β = 0.714, p < 0.001) and risk management (β = 0.655, p < 0.001). Investment strategy (β = 0.253, p = 0.012) and risk management (β = 0.574, p < 0.001) positively influenced the investment decision. Mediating effect analysis has found highly significant indirect influence through investment strategy (β = 0.181, p = 0.013) and risk management (β = 0.376, p < 0.001). The aspect of financial literacy plays a vital role in improving investment decisions both directly and indirectly. Better financial education and risk management techniques can help individual investors in making better decisions on investing and adopting sustainable investment behavior.