The Journal of Developing Areas

Risk tolerance has a great impact on every individual's portfolio decision. It is a very important factor to be considered to achieve long term financial goals. The low level of risk tolerance may put back the individuals from investing in stocks or other long term investment avenues which will result in a shortfall of income in the retirement period. Individuals with extremely high risk tolerance may suffer losses of wealth by considering short term investment with high return portfolios. The purpose of the paper is to find out the influence of demographic characteristics and personal financial knowledge on risk tolerance levels among working adults in India. Six demographic variables namely gender, age, education, income, marital status and occupation have been studied in relation to risk tolerance level. Study also analyzes the influence of personal financial knowledge on risk tolerance level. The study is based on primary data collected through structured questionnaire to capture various dimensions of risk and personal financial knowledge. To capture various dimensions of risk tolerance level of individuals, this study used structured questionnaire of Grable.J and R.H. Lytton (1999). Personal financial knowledge has been measured based on five dimensions i.e. money management, investment planning, insurance planning, retirement planning and tax planning. Regression analysis was employed for 297 responses to assess which of the variables influence the levels of risk tolerance. It is observed in the present study that male are more risk tolerant than female. The result suggests that the risk tolerance of a respondent generally increases as income increases. The results also suggest that higher education indicates an increased risk tolerance. Demographic characteristics such as occupation, age and marital status were found to be significant. Level of financial knowledge has significant positive relationship with risk tolerance indicating that individuals with higher personal finance knowledge will be willing to take informed higher risks. Present study brings out the age, education and personal financial knowledge as the important antecedents to risk tolerance level of Indian individuals which highlights the necessity to involve basic finance course in different levels of education curriculum. Present study will assist financial service providers in asset management industry in manufacturing better financial products. More risky and high yielding products can be designed for more educated male who are employed in service.