Post-Graduate Department of Commerce and Research Centre

St. Thomas College, Kozhencherry.P.O, Pathanamthitta (Dist.)

Kerala, Pin-689 641, (NAAC Accredited with B++ Grading)

Dr. P Antony George 21st Sept. 2014

Associate Professor

To,
Prof. Kshama Agarwal,
Dept. of EAFM,
University of Rajasthan,
Jaipur - Rajasthan.

Dear Sir,

In response to call for research papers for presentation in 67th AII India
Commerce Conference by ICA, I have great pleasure to submit a research paper titled
"A Psychometric Assessment of Risk Tolerance and Financial Behaviour of
Individual Investors in Indian Capital Market” for your evaluation and selecting the
paper for the presentation All India Commerce Conference. Kindly consider this research
paper for BBAY award session also. Sincerely hope that this letter will find you in good
health and happiness. Expecting a positive reply after evaluation of this research paper.
Thanking You,

Yours Sincerely,
(Sd/-)
Dr.P. Antony George

Kallumpurath Kottarathil Puthiyakavu , Mavelikara PO Alleppey (Dist) Kerala 690101,

Phone: 0479-2303242, Mobile: 9495953243, 9446917752, Email: agkavalam@yahoo.com
A Psychometric Assessment of Risk Tolerance
and Financial Behaviour of Individual
Investors in Indian Capital Market

Research Paper - Technical Session II

67th All India Commerce Conference
Indian Commerce Association

Dr. P. Antony George, M.com.P.hD.

Associate Professor
Post-Graduate Department of Commerce and Research Centre
St. Thomas College, KozhencheryP.O, Pathanamthitta, Kerala - 689 641
(NAAC Accredited with B++ Grading)
Ph: 0479 2303242 Mob: 9495953243, 9446917752 e-mail :agkavalam@yahoo.com
Mahatma Gandhi University, Kottayam

September
2014
 A Psychometric Assessment of Risk Tolerance and
Financial Behaviour of Individual Investors in
Indian Capital Market

Research Paper-Abstract
67th All India Commerce Conference Technical Session-II

Individual investors contribute substantially to Gross Domestic Saving(GDS) in India and

naturally their financial behavior and attitude in portfolio decision noticeably influence the
direction and pattern of resource allocation function within the economic system. One of the
unhealthy trends in the saving and investment of programme by individual investors is that out of
their surplus financial resources a substantial portion was mobilized government, banks and
financial institutions which is a major hurdle in channalising the savings of individual investors
to productive sectors of the economy directly and limit their wealth maximization through
portfolio decision. Unrealistic Risk tolerance and financial behavior of investors has been
diagnosed as a prominent reason for low preference of individual investors towards common
stock and similar risky securities. In this context, the pertinent question emerges on this issue is
that how do and to what extent the risk tolerance and financial behavior of individual investors
influence their portfolio decision. This psychometric study was conducted to examine this
complex financial issue empirically. In this study the risk tolerance of individual investors was
scientifically measured by employing a risk tolerance test using a behavioural approach.
Arithmetical average, correlation standard deviation, regression, cluster analysis cumulative
logistics analysis Z test etc. were the different descriptive and inferential statistical measures
employed to analyse data. The study clearly reveals that risk tolerance and other psychographic
characteristics of individual investors strongly influence their portfolio decisions and financial
preference. The study also shows that there is significant difference the risk tolerance of
individual investors belonging to different demographic, geographic and longitudinal categories.
Portfolio decision is a cognitive process characterized by systematic biases and distortions.
Individual investors in general do not react consistently when they face risk rather they exhibit
systematic biases and sensitivities. This disproportionality in individual’s risk tolerance may
make the capital market inefficient and limit the wealth maximization of individual through
portfolio decisions. The superior brain and market intelligence alone do not guarantee generation
of extra financial gain from capital market rather emotional maturity manifested in balanced risk
tolerance, diligence, patience and contrary thinking positively help individual investors to have
sensibility and confidence to enter capital market which make possible creation of millions of
equity centric portfolio by investors that will strengthen Indian financial system and enhance
prosperity and welfare of one and all.

Associate Professor, Post Graduate Department of commerce & Research Centre, St. Thomas College,
Kozhencherry, Pathanamthitta, Kerala.(NAAC accredited with B++),
Ph: ® 0479 - 2303242, Mob:9495953243, 9446917752, E-mail agkavalam®yahoo.com
 A Psychometric Assessment of Risk Tolerance and
Financial Behaviour of Individual Investors in
Indian Capital Market

INTRODUCTION
The contribution of individual investors belongings to household sector to Gross
Domestic Savings (GDS) in India has been estimated to be about seventy percent that clearly
implies their significant role in accelerating the capital formation and the growth of Indian
financial system in the right direction. The psychological and behavioural characteristic,
approach and attitude of individual investors influence their saving and investment decision
which exert strong impact on resource allocation faction of the financial system and their wealth
maximization through financial decision. The generation of adequate saving by individual
investors and the Judicious and fair allocation of the surplus financial resources to productive
sectors of the economy through financial and physical assets largely determine the direction and
trend in the growth of financial system and its prospects and destiny. Similarly, the dynamism,
vibrancy, sustainability and its capacity to remain in the trajectory of high growth rate to a great
extent depends on sensible and appropriate portfolio decision of individual investors and their
active participation in the financial market. More importantly, only when the individual investors
directly allocate their savings to common stock and growth oriented securities they can ensure
wealth maximization through portfolio decision. Empirical Investigations reveals that the
willingness and enthusiasm of individual investors in channelizing their surplus financial
resource through appropriate portfolios largely depends on their level of risk tolerance and other
psychographic characteristic influencing portfolio decision. A thorough examination of saving
allocation pattern of individual investors in Indian financial system indicates that the approach of
individual investors in diverting their savings to shares and other risky securities is really
discouraging and imbalanced since a substantial portion their saving has been mobilized by
government, banks and other financial institutions through depository financial instruments. This
asymmetrical trend in resources allocation is a major hurdle in channelization of the household
savings to productive sectors individual’s wealth maximization and also obstructs the promotion
nurturing of the entrepreneurial spirit of millions of risk-takers in industry, services and
agricultural sectors in the economy. Another major problem that the individual investor with
inappropriately low risk tolerance may face is the huge difference in the retirement benefits from
contributory pension scheme. Thus, the reluctance of individual investors to allocate a
reasonable amount of their savings to risky securities poses some challenge to the sustainable
growth of financial system and prosperity and well being of individual investors. The present
study attempt to empirically investigate this the complex issue in financial system in respect of
portfolio management by individual investors to have a realistic and fair be on this issue.
Need for and significance of the study
The active involvement and participation of individual investors in the capital market is a
prerequisite for infusing dynamism and to ensure sustainable growth of financial market. In fact,
willingness and interest of individual investors for the allocation of major portion of their saving
to risky investment instrument such as equity, corporate bonds and debentures, mutual funds etc.
to a great extent depend on their appetite towards risk and some other characteristics of individual
investors. Though scholarly studies Rosenberg (2005) Soldofsky et.al(2008) examined this issue,
a scientific measurement and analysis of risk tolerance and financial behavior of individual
investors had not been adequately covered in these studies. The political leaders, authorities and
policy makers at the helm of financial market are very much interested in getting reliable and
factual information on the issue to address and resolve problems associated with financial market.
Therefore the findings of the present study may generate some knowledge to enrich the existing
theory on this academic area and beneficial in the formulation of financial policies and
programmes.

Statement of the problem

The Saving and investment decision process of individual investors is influenced by
diversified variables and considerations. The difference in demographic, psychographic and
behaviouristic characteristics of individual investors have noticeable impact on the level of risk
tolerance and financial behaviour. In a way, these factors considerations are the determinants of
their saving propensity and selection of different types of physical and financial assets in their
portfolio. In this context, a pertinent question on this issue arises is, in what way these factors
influence the risk tolerance and financial behavior of individual investors. Especially, how does
risk tolerance exert influence in the investment programme and portfolio design of individual
investors. The following are the empirical questions that are emerged during the
conceptualization and opertionalisation of the research problem.

1. Is risk tolerance a prominent psychographic factor influencing the portfolio decision and
financial behavior of individual investors?
2. To what extent risk tolerance influence different categories of individual investors in the
selection of financial/physical assets in their portfolio?
3. To what extent there is difference in the level of risk tolerance of different categories of
Individual investors ?
Objectives of the study
To find answers to above questions, the following objectives were formulated for the
study
1. To assess and evaluate the level of risk tolerance of different categories of individual
investors in portfolio decision.
2. To measure and analyse the degree of difference in the risk tolerance of different
categories of investors using cumulative logistic analysis
3. To diagnose various clusters of individual investors in terms of degree of risk tolerance
and analyse the distinctive characters ion of these clusters.
4. To examine whether the risk tolerance influence the composition and design of portfolio
and in the financial preference of individual investors.
Hypotheses
1) There is no significant difference in the risk tolerance of individual investors belonging to
different geographical regions.

2) There is no significant difference in the risk tolerance of individual investors belonging to

different demographic categories of individual investors .

3) There is no significant difference in the risk tolerance of individual investors in different time
periods/longitudinally.

4) There is no correlation between risk tolerance and demographic characteristics /financial

behavior of individual investors.

5) There is no significant impact of risk tolerance on the portfolio composition and financial
preference of individual investors.

Limitations of the study

1. Risk tolerance is a, complex qualitative psychographic attribute and measurement of 'this

variable in quantitative term using interval level data may not have the accuracy and
reliability of ratio level quantitative data.

2. The behaviour and approach of individual investors may likely to change in accordance
with change in economic, social and cultural environment. Therefore the findings of the
study may not be very realistic in different time periods and geographical regions.

3. The portfolio selection and design of individual investors is influenced by variables

other than risk tolerance and other variables covered in the study. Therefore inclusion of
other variable may produce more realistic results.

LITERATURE REVIEW
Several outstanding research studies are conducted on risk tolerance and financial behavior of
individual investors which reveal insightful findings on this research issue. Coggin et. al (2007)
in their outstanding study examined the risk factors associated with portfolio selection and
management and elaboratively discussed the techniques and methods to face the risk factors. The
meta-analysis of pricing risk factor is really a model for serious researchers in this area.

In his well known study Droms (1987) beautifully presented a model for allocation of
savings to different categories of securities. He clearly depicted how an individual investor select
financial assets and manage risk to create rewarding portfolio. The findings of this study is very
insightful for investors to develop a balanced and matured approach in investment programme

In an interesting research study Markowitz (1991) made a comparative analysis of the

different dimensions of individual and institutional investors. The study clearly shows that for
successful investment and portfolio creation, individual investors should develop risk tolerance
and investment virtues. As per the findings of the study institutional investors are more
professional in investment programme and manage the complexities in the investment process
more efficiently.

Rosenbergo et. al (1996) conducted a study to measure and analyse systematic risk
associated with portfolio having very high equity component. The methods and techniques
suggested in the study for prediction of systematic risk associated with risky portfolio are very
useful for individual investors with high-risk tolerance. The study is also very useful for
academic community and researches for its contribution to literature on portfolio theory

Another practically useful study in this area was conducted by Smith (1974) in which he
examined the capacity of individual investors to assume risk in the selection and mixing of
financial assets in the portfolio. The findings of the study showed that only those individual
investors with reasonable degree of risk tolerance and foresight can take financially rewarding
portfolio decision.

Financial risk tolerance has been measured using several techniques. The techniques can be
separated into measures based on observing risky behavior and measures using surveys to ask
questions that gauge one's willingness to assume risk in given situations (Hanna, Gutter, & Fan
2001; Hanna & Lindamood, 2004). Some studies infer financial risk tolerance from behavior
such as ownership of risky assets or the ratio of risky assets to total wealth (Cohn, Lewellen,
Lease, & Schlarbaum 1975; Friend & Blume, 1975; Fama & Schwert, 1977; Morin & Suarez,
1983; Mclnish, Ramaswami, & Srivastava, 1993; Schooley & Worden 1996). However, studies
based on behavior often are influenced by self-selection bias and do not typically consider other
factors that would prevent ownership such as financial constraints, discrimination or lack of
exposure to information about financial markets. The Health and Retirement Survey posed
hypothetical scenarios to obtain a measure of financial risk tolerance related to the economic
concept of' risk aversion (Barsky .et al., 1997). Grable (2000) presented a combination of
investment choices and subjective perceptions.

The above mention studies on risk tolerance and behaviour of individual investors
clearly shows that there is some relationship between risk tolerance and portfolio decision.
However an analysis of the findings of the studies suggest some research gaps especially
scientific measurement risk tolerance and comparative analysis of difference in nature and
financial behavior of different categories of investors. in this area. The present study endeavors to
examine this research issue with a focus on the research gaps identified.

METHODOLOGY
An appropriator methodology had been formulated for the study keeping in mind the
qualitative and abstract variables that are associated with the research problems. The research
issues and qualitative terms were suitably operationalised and an appropriate conceptual design,
measurement procedures, sample design, analytical design data display design hypotheses testing
were developed in conformity with research objection and hypotheses.
Population / Universe : The individual investors both male and female within the age group of
21-75 years residing in selected regions in India who have exposure to financial market
constituted the population if the study. Research Approach : A behavioristic and psychometric
approach had been adopted for collection of data to avoid respondent’s self perception in their
responses and both qualitative and quantitative approaches had been followed. Research
Method: The study mainly followed survey method of data collection. However observation
method was also appropriately employed considering its effectiveness in some practical
situations. Sample Design: A suitable sample design was adopted for the execution of the study
with an empirical focus on research problem. Sample frame/source list had been prepared from
the list of individual investors from share broking firms located in different areas. Size of the
sample had been determined considering the nature of universe, standard of accuracy and other
research considerations. The approach based on precision rate and confidence level had been
employed to determine the sample size. Simple random sampling was the method of sampling
employed for the selection of sample unit. Questionnaire was the method of data collection
used for the collection of primary data. In the analysis design suitable descriptive and inferential
statistical measures such as averages, standard deviation, correlation, regression, Z test, cumulate
logistic analysis, cluster analysis etc. had been employed. Face validly and content validity
were the validity tests employed to determine validity of measures. Spilt half reliability and
test-retest reliability had been employed to determine the reliability of measures used.
Dependent variable employed in this study was the risk tolerance of individual investors
in terms of score assigned to them as per risk tolerance test. The level of risk tolerance of
individuals attributable to different components of risk measured to derive interval level data on
this qualitative variable.
Independent variables selected for the study were demographic, financial and
geographic characteristics such as education, life cycle, social classes, occupation status, regional
background, time periods etc. A cumulative logistic model had been employed for the risk
tolerance analysis. The model allows different independent variables to have multi dimensional
effects on the risk tolerance and examine the effects of explanatory variables on the probability of
individual investors to assume different levels of risk tolerance.
Conceptual and analytical framework
To conduct the research study with maximum academic clarity and research focus, a
conceptual and analytical frame had been developed. In the frame work different variable
identified to examine the research problem are presented in an integrated manner. The
identification and conceptualization of different abstract concepts that are basically qualitative the
nature is very useful to view the research problem sensibly and execute the study by employing
appropriate methods and procedures.
 Fig:1
Conceptual and analytical framework of the study

Age Grouping Cluster

Life Segmenting Saving
Gender Cycles Analysis Propensity
Investors

Diagnosing Demographic Analysis

Profile of Individual of Risk Impact of
Investors Tolerance Risk Tolerance

Application Cumulative
Social Income of Risk Preference Preference
Logistic
Classes Education Tolerance for for
Analysis Forms
Test Securities
of Return

Measurement and analysis of risk tolerance

To measure the risk tolerance, a risk tolerance test was conducted which was adopted
from empirical study conducted by the T. Ronce Price group of mutual fund, USA with some
modifications. Since direct question on risk tolerance might fail to reveal the true dimensions of
risk tolerance, this behavioristic approach was adopted. The test consisted of three sets of
questions made to test how the customers are comfortable with risk on different situations of
uncertainty. Respondents were asked to select one answer for each set of questions and
depending on their choices, scores were assigned. Respondents could select their choices on the
basis of the level of risk tolerance and those having high risk tolerance would select choices with
high scores and vice versa. No hints were given in the questionnaire on allocation of scores for
options for questions so that respondents might select their right choice avoiding their self
perception.

Risk-tolerance score and its significance

Respondents would get different points on the basis of their selection of options. The
higher the total point the higher would be the risk tolerance. The following format gives the
scores allocated to different questions given in the questionnaire.

Classification of respondents according to risk tolerance

Three to seven points Individual investors who score between three to seven points are very
conservative and the risk-averse. They would prefer to minimize risk in portfolio decision. The
lower the score, the more cautious and conservative the individual would be.

Eight to fourteen points Individual Investors who score between eight to fourteen points are
moderately risk tolerant. They would assume reasonable risk for moderate increase in return.
They would like to buy financial assets with equity components and have preference for saving
products with moderate equity components offered by mutual funds.

Fifteen to twenty one points Individual investors who score between fifteen to twenty one
points have high-risk tolerance. They would be willing to take more chances in pursuit of
maximum return. The higher the score the higher will be the risk tolerance. While investing in
financial assets they look for high overall return and prefer securities having high potential for
profit and growth.

RESULTS AND DISCUSSION

The results of the study are presented as answers to research questions given as the
specific objectives of the study. In this analysis, individual investors are classified ' into three
groups in terms of their risk tolerance. Individual investors with low risk tolerance constituted the
first group that scored between 1-7 points and those with moderate risk tolerance constituted the
second group who scored between 8-14 points and the third group consisted of individual
investors with high-risk tolerance having scored between 15-21 points. The overall risk tolerance
of the 300 respondents is analysed by grouping them in three distinctive groups with different
ranges of scores.

Table 1: Risk Tolerance of Individual Investors - Categories

Level Group Sammp Mean Stand 95%
Risk le size score ard confidential
tolerance error interval
1-7 Risk averse 139 4.31 0.263 (5.101,
(Low risk) 2 3.52)
8-14 ModerateRisk 125 10.2 0.284 (1.106.
loving (High risk) 34 9.402)
15-21 Risk loving 36 16.2 0.319 (17.224,
Substantial Risk 67 15.310)
Sample size 300

Source: Primary Date

Risk tolerance analysis suggests that general attitude of individual investors towards risk
is not very positive because number of investors coming under the risk loving segments is about
10percent of the sample size and also the mean score of different categories are near to the lowest
range of risk tolerance. Similarly, the majority of individuals belong to the risk averse category,
which is also a clear indication of a lack of appetite of individual investors towards risk and their
risk avoiding characteristic. Multivariable analysis of this variable in combination with some
demographic variable may also be useful to reveal other clues on risk appetite and financial
behavior of individual investors.
 Table- 2 Risk Tolerance - Demographic and Behaviourist Categories
Individual investors in Different Age Group
Age group Sample Risk tolerance Stadard error 95% confidential interval
Size (Mean score)
20-35 63 14.4 0.419 15.657, 13.143
35-50 128 12.3 0.292 13.176, 11.42
50-65 74 8.4 0.372 9.516, 11.424
65 and above 35 6.9 0.524 8.472, 5.328
Individual Investors in Different Gender Group
Male 202 15.3 0.217 15.951, 14.649
Female 98 6.4 0.312 7.336, 5.464
Individual Investors in Different Occupation
Employees 115 8.2 0.283 9.049, 7.351
Professionals 35 11.3 0.529 12.887, 9.713
Businessmen 72 17.5 0.382 18.646, 16.354
Retired 42 6.4 0.494 7.882, 4.918
Self 36 11.2 0.532 12.796, 9.604
employed
Individual Investors in Different Life Cycles
Bachelor 35 14.8 0.421 16.063, 13.537
empty nest
Young 36 13.5 0.473 14.919, 12.081
married
empty nest
Yong 111 12.4 0.284 13.252, 11.548
full nest
Older 81 8.7 0.412 9.936, 7.464
full nest
Older empty 37 7.4 0.539 9.017, 5.783
nest
Individual Investors Investors in Different Social Classes
Upper class 102 13.9 0.342 14.926, 12.874
Upper middle 113 12.8 0.312 13.736, 11.864
class
Lower middle 48 9.5 0.513 11.039, 7.961
class
Lower 37 7.2 0.549 8.847, 5.553
class
Source: Primary data

Results of the multivariable analysis in respect of risk tolerance suggests the risk appetite
of various categories of individual investors. In the age group, individual investors within the age
group of 20-34 are more comfortable with risk, which is clear from the higher risk tolerance
mean score. Because young individuals who wish to make a possible fortune, will be ready to
assume more risks in the construction portfolio. This age group generally invest more than
60percent of savings in growth oriented securities and financial assets with high equity
components and naturally they have the capacity to assume higher risk. Individual belonging to
higher age group do not follow an aggressive investment strategy and avoid risky investment
programmes because their main financial goal is to have a regular and consistent income and
adequate liquid fund. Consequently, they prefer risk free financial securities and as far as
possible, they avoid any form of risk in portfolio decisions and it is clearly reflected in the low
risk tolerance score of higher age group segment.
Table-3 Risk Tolerance of Individual Investors- Difference in
Demographic Categories (P value 5% significant level)
Age group 20-35 35-50 50-65 65 and above
20-35 - 0 0 0.034
35-50 - - 0.024 0
50-65 - - - 0
65 and - - - 0
above
65 and - - - -
above
Occupation Employees Professionals Businessmen Retired Self employed
Employees - 0 0 0.0 0
34
Professionals - - 0.024 0 0
Businessmen - - - 0 0
Retired - - - - 0
Self employed - - - - -
Life Bachelor Young married Young full Older Older empty nest
Cycles empty empty nest nest full nest
Bachelor - 0.0056 0.0124 0.0 0
empty 012
3
Young married - - 0.0124 0 0
empty nest
Yong full nest - - - 0.0 0
024
Older full nest - - - - 0
Older empty - - - - -
nest
Social classes Upper Upper Middle Lower middle class Lower class
class class
Upper class - 0.0056 0.0134 0.00123
Upper middle - - 0.0124 0
class
Lower middle - - - 0.0024
class
Lower class - - - -
Source: primary data
 Table:4 Cumulative Logistic Analysis of Risk Tolerance –Demographic,
Geographic and Longitudinal Categories
Level of Risk Substantial Risk High Risk Low Risk
Tolerance
Parameter Coefficient Odd Ratio Coefficien Odd Ratio Coefficient Odd Ratio
t
Geographical Background: Reference Category =Central region
Southern 0.0182 0.96 0.0235 0.95 0.0213 0.96
Northern 0.3258 1.38 0.0135 0.07 0.657 0.57
Western 0.439 1.53 0.0597 1.09 0.1923 0.87
Eastern 0.0195 0.97 0.0213 0.97 0.0232 0.97
Education: Reference category= Higher Secondary
Graduate 0.321 1.37 0.734 2.08 0.232 0.79
Post Graduate 0.389 1.42 0.231 1.25 0.0159 0.98
Professional 0.418 1.52 0.208 1.18 0.0182 0.94
Life Cycles : Reference Category= Young Full Nest
Bachelor Empty 0.458 1.63 0.205 1.18 0.0172 0.95
Nest
Young arried 0.278 1.38 0.0607 1.09 0.183 0.87
Empty Nest
Older Full Nest 0.139 0.84 0.164 0.86 0.481 0.63
Older Empty 0.114 0.87 0.125 0.88 0.158 0.84
Nest
Social Classes : Reference Category = Middle class
Upper class 0.123 1.12 0.0912 1.09 0.0163 0.98
Upper Middle 0.325 1.38 0.128 1.03 0.181 0.84
Class
Lower Middle 0.0358 0.96 0.0265 0.96 0.065 1.05
Class
Lower Class 0.389 0.75 0.072 0.72 0.089 0.92
Occupation Status : Reference Category Salary earness
Self employed 0.577 1.83 0.346 1.35 0.315 1.28
Professionals 0.405 1.48 0.213 1.24 0.016 0.96
Business men 0.662 1.92 0.354 1.41 0.314 1.32
Retired 0.112 0.88 0.109 0.93 0.072 0.97
Longitudinal Category: Reference Period = 2000
2005 0.142 0.87 0.164 0.85 0.475 0.62
2010 0.232 0.79 0.098 0.91 0.048 0.95
2012 0.406 0.67 0.016 0.98 0.056 1.06
Source Primary Data
 Analysis of risk tolerance of different groups of individual investors reveals some
interesting information on risk tolerance of investors. The investors belonging to lower age group
are comfortable with high risk and as the individuals become old, there is substantial reduction in
their risk assumption capacity, which reflects in low tolerance score. Similarly, while male
investors shows higher risk tolerance in portfolio decisions, the risk assumption capacity of
female investors is comparatively low. Businessmen belonging to occupational group exhibit the
highest risk tolerance, which shows their enterprising and aggressive attitude in the investment
programme. On the contrary, retired fellows shows risk aversion characteristics who naturally
dislike financial assets with high equity component. Similarly, as investors pass through bachelor
to old empty-nest life cycle there is gradual and noticeable reduction in the risk tolerance.
Likewise, investors in upper class and upper middle class are more comfortable with risk and
lower social class segment also shows high risk aversion.
In order to examine the difference in the risk tolerance of investors in different groups, P
values of risk tolerance is calculated.~ P values of risk tolerance score of investors in different
life cycles suggest the level of risk tolerance of investors different life cycle is not equal. Because
as per risk tolerance test in all the cases P values are less than 0.05. As in the investors pass
through different phases in the life cycle stages their attitude toward risk varies and exhibits
different degrees of risk tolerance. Similarly, P values calculated for the risk tolerance of
investors in different demographic categories also indicates the difference in the level of risk
tolerance of customers belonging to these groups since P values in all the cases are less than 0.05
Similar insightful findings are also revealed in the analysis in respect different
demographic categories of investors. The bachelor empty nest shows their adventurous attitude
towards portfolio discussions. This category of individuals generally willing to take susbstatial
risk to so as to squeeze maximum benefits from opportunities available. Similerly the high risk
tolerance in terms of odd ratio of businessmen is a clear indication of their true self. The
Businessmen are by nature welcome substantial risk when they expect substantial gain from
business opportunities including capital market operation.

The multiple correlations between risk tolerance and demographic variables are analysed
in this study to examine the degree of relationship between these variables. The multiple
correlation between demographic variables such as income, age, education and risk tolerance and
between the above mentioned variables and saving propensity is analysed. The demographic
variables income, age, education have been taken as predictors (constant) and risk tolerance and
saving propensity have been taken as dependent variables. The results of the analysis are
presented in the following table.

Table:5 Multiple Correlation- Risk Tolerance and Other Demographic Variables

Predictors Dependant Correlation Standard error Significance
(constant) variable (5 percent)
Income Age Risk Tolerance 0.573 9.238 0.025
Education
Income Age Saving 0.546 8.8594 0.015
Education propensity
Source Primary Data
 As per the results derived from the table, multiple correlations among demographic
variables income, age, education and risk tolerance and saving propensity is significant. The
result derived from multiple correlation analysis rejected the fourth hypothesis developed
for the study
As per the risk tolerance analysis, there are three categories of individual investors in
term of their attitude towards risk. Categorization of majority of the investors in the risk averse
and the moderate risk-loving is an insightful finding. The finding is especially important for
mutual fund, which develops various products mainly on the basis of risk tolerance of individual
investors. Similarly, this findings also confirms the finding on the degree of influence of safety
consideration of investors because the high safety consciousness of individual investors shows
the low risk tolerance and vice versa. This finding is in consistent with the result of the study by
Sug.J.et.al. Investors within the age group of 20-35 exhibit more risk tolerance and those
belonging to the age group of 65 years and above exhibit a low risk tolerance. It is a fact that
individuals in the lower age groups are comparatively more adventurous compared to old and it
will be naturally reflected in their financial behaviour portfolio decisions.
Similarly, males have more risk tolerance than females because generally females are less
aggressive and more cautious in financial matters. Analysis of risk tolerance of investors in
different occupation shows that businessmen exhibit a high degree of risk tolerance than the
employees, the retired etc. This finding is in conformity with the risk appetite of individuals
engaged in different occupations. It is an accepted fact that usually individuals who have the
capacity to assume high risk, undertake business. Therefore in the purchase of financial securities
also they follow an aggressive approach with high risk tolerance and prefer to create portfolio
with high equity components and high return. Analysis of risk tolerance of investors in different
life cycles suggests that bachelor empty nest has the highest risk tolerance followed by young
married full nest. Other investors in different life cycles exhibit comparatively low risk tolerance.
When the individuals have less responsibility and more independence at the lower stages of the
life cycle, they would like to assume more risk in the portfolio decisions which may be may be a
probable reason for the high risk tolerance of the investors in the category.
Commutative logistic analysis presents odd ratio derived from logistic regression
suggesting the relative effect at the values of other variable on the likelihood of the degree of risk
tolerance. Geographic characteristics (location of individuals) and level of risk tolerance of
individual investors reveals some interesting facts. Individuals in the southern region in India are
only 96 percent as likely and in the eastern region are only 97 per cent likely as otherwise similar
individual investors to be willing to take substantial risk. However individuals in the northern
region are 1.38 times as likely as otherwise similar individuals in central region. However
individuals in the northern region are 1.53 times as likely as otherwise similar individual is
central region. The logistic analysis also present a clear measurement and analysis of degree of
risk tolerance of different demographic and psychographic categories of individual investors.
The model clearly illustrate the importance that geographic characteristics represented by
culture and ethnic status and demographic characteristic on the financial behavior and risk
tolerance of individual investors. The level of risk tolerance of individual investors in northern
and eastern region is much higher in comparison to the love towards risk by individuals residing
in other regions in India. The most probable reason for the willingness of individuals belonging
to western and northern region to assume more risk may be their long term exposure to capital
market and enterprising skill in business matters. As a matter of fact the presence of prominent
stock exchanges and popular capital market intermediaries functioning in the region may trigger
the financial curiosity of the individual investors to develop active participation and involved in
capital market operation.
In the light of the empirical results derived from first second and third null
hypotheses are rejected.

Impact of risk tolerance on portfolio selection and financial preference.

The Impact of risk tolerance of individual investors on portfolio selection and
Management is analysed the following section.
Table-6 Impact of Risk Tolerance on Portfolio Decision and Financial Preference
Categories of Individual Risk Tolerance Proportion of Preference for Correlation
investors Mean Value Equity in Portfolio Capital Gain P Value <005
Risk Average 4.32 15.5 3.82
Moderate Risk Loving 10.23 58.7 6.39 0.85
Risk Loving 16.24 72.5 8.43
Source primary data

The above tables clearly suggest the strong correlation between the level of risk tolerance and
portfolio selection and financial preference preference for forms of return. Individual investors
who exhibit high risk tolerance prefer to create portfolio with risky financial assets especially
equity. In the light of above result fifth null hypothesis has been rejected. However the
number of individual investors who are willing to assume risk is very few and naturally the
involvement of small investors in the capital market is very dreary. The individual investors who
have very low risk tolerance are afraid of risky financial assets and satisfied with fixed return
from safe investment avenue. The most undesirable trends in saving and investment behaviour of
individual investors is their reluctance to enter capital market even through mutual funds with
high equity component . Aggressive marketing and sales promotion programmers initiated by
private insurance players to a great extent divert the savings of individual investors to insurance
sector. However the direct participation of more intelligent and matured individual investors in
the capital market is very essential to ensure the sustainability and desired progress of stock
market. In fact, a substantial portion of transaction in the capital market have been conducted by
individual investors which make the capital market to progress in the right way and direction.
However some undesirable and unethical tendencies and practices in the stock market is a major
reason identified for the gradual reduction in the risk tolerance of ordinary investors. Bulk deals
by institutional investors at unexpected time make the capital market highly volatile and
individual investors are dragged to chopping stock market sessions that may again reduce their
risk tolerance.

Clusters of individual investors

Different clusters of individual investors identified on the basis of Custer analysis and distinctive
characteristics of these segments are presented the following table.
 Table-7 Clusters of Individual Investors and their Financial Characteristics
Clusters
Profile of
Risk averse-conservative Moderate risk-loving Risk loving
clusters
investors professional investors aggressive
investors
Principal  Long term financial   Flexibility   High return

Benefits return   Time convenience   Flexibility and

Sought  High safety of investment   Simple and transparent  liquidity

 Costless service service   Speedy, prompt

 Guaranteed return   Expert financial advice services

 Medium term gain.   Short term gain

Distinctive  Price sensitivity  Moderate risk tolerance  High risk

Characteri'  Very low risk tolerance  Consultation with tolerance

stics  Demanding financial experts  Price sensitivity

 Long-term solvency  Strategical approach in  Confident

consciousness portfolio management financial decisions

 Least importance to  Medium-term solvency  consultation with

capital gains consciousness experts

 Middle age/retiring people
Demographic  Moderate income
Characteristics
 Large family size
 General education
 Self employed with low
investment
 Housewives
Financial  Reliance on savings
 Mixed age
 Moderate to high income
 Small family size
 College/professional
education
 Higher/intermediate
 professionals and
managers
 Non-residents
 Optimistic view on
 Short term solvency
 Young/middle age
 Small family size
 College/profession
all education
 Industrial employers
 Self-employed
 Non-residents
  Short-term financial

Attitudes  Favourable attitude towards financial matters Planning

Depositories  Preference for medium  High multiple use of

 Aversion of credit term financial instruments financial institutions

 Long-term financial planning  Medium-term financial  Switching loyalty

 Expect only normal rate of planning  High preference of

return  No credit aversion equities products

 Users of credit cards .  Heavy users of

 Shifting loyalty credit cards

Savings  High preference for long-  Medium propensity to save  High propensity to
behaviour term financial products,  Above average use of save
andbanking  Maintain account with financial Institutions  Multiple use of FI

habits number of batiks number of  Preference for investment  Accounts with

batiks intermediaries number of bank

 Average use of financial  Average number of credit  Very much

Institutions Cards interested in E-

 Below average number of  Interested in E'-banking banking
personal loans  Medium term investment  Short/medium term

 Not interested in E banking objectives investment objective

 According to the table, three prominent clusters emerge from the cluster analysis of
individual investors. Cluster-1, risk averse conservative investors is a pre-eminent group of
investors having the least risk tolerance who adopts a very cautious approach in portfolio
investment decisions. They want personal care and individualised attentions and relationship
marketing in financial services seems to be very effective in satisfying their specific financial
requirements. Safety of investment and assured return are the main considerations of this
conservative investors who do not compromise with modern approach in portfolio management.
High price sensitivity, very low appetite towards risk and long term financial solvency are some
of the distinctive characteristics of this cluster. An analysis of demographic profile shows that the
majority of members of this group are middle aged and retired having .moderate income and
average education. They have to look after their dependent family consisting of children and
dependent parents. Housewives who are the least participating segment in the organised financial
market belong to this cluster. Majority of the members are clerical/supervisory and self
employed. Financial attitude of this cluster reveals that they have a high dependence on saving
and maintain negative views on credit, Since they are very cautious and seek guaranteed return,
they always prefer well known depository intermediaries which offer assured return in the form
of fixed interest on deposit. They always give top priority to long term financial goal, and design
their portfolio to attain the objective of normal rate of return from investment. High propensity
for saving is the most important characteristic feature revealed in the analysis of savings
behaviour and banking habits of this cluster. Since they have long term financial planning in
portfolio management, they naturally prefer financial products · with long term maturity. Their
aversion to bank credit is responsible for the below average number of personal loan in their
financial portfolio. Since they have a traditional approach in financial planning and portfolio
creation, they are least interested in modem innovations in financial market.
Cluster-II, moderate risk loving professional investors are very particular in following a
professional approach in their financial planning and portfolio management. Analysis of
distinctive characteristics of this cluster divulges the professional touch in their financial decision
making. They believe in the superior benefits of consultation with experts and innovative
approach in portfolio management. They always have a moderate view on financial matters,
which is very clear from the moderate risk tolerance, moderate price sensitivity.Their reliance on
'golden average' ensures consistency in return on investment and the exhibit inherent strength to
recover from financial adversities. Demographic characteristics of the cluster show that members
of the group belong to different age group with clear dominance of the middle aged group.
Investors with moderate income constitute the majority, even though customers with high income
also make their strong presence felt in this cluster. The family size of this cluster is comparatively
small and they have professional education and are employed in higher managerial jobs. An
analysis of financial attitudes shows their rationality and maturity in financial matters and
portfolio decisions. They maintain an optimistic view on financial matters and medium term
financial instruments are their favorites. Analysis of savings behaviour and banking habits also
reveals their balanced and rational approach in developing a well-founded saving pattern and
banking habits. They'do not believe in excess savings and their propensity to save commensurate
with the income and they find pleasure in spending money to achieve their financial goals. Their
balanced view on portfolio management is instrumental in creation of portfolios with different
proportions of equity and debt instruments. They have a high preference for mutual fund products
since products having different proportions of equity and debt can be selected from mutual funds.
US 2002, UTI Variable Investment Scheme, Master Equity Plan, Children's Career Plan etc. of
UTI are the favorites of this group.

Cluster-III, risk loving aggressive investors exhibits aggressive characteristics in all dimensions
of the investment activity and portfolio decision. High risk tolerance is the most important
characteristic feature of this cluster who always expects exceptional return from their portfolio.
Generally they want high degree of flexibility and liquidity in portfolio, and also expect speedy
and prompt customer service from FIs. If the employees of the FIs are not knowledgeable and
skilled, it will definitely displease this dynamic and futuristic-minded segment. Price Sensitivity,
self-reliance and confidence in the management of investment mattersl financial planing to attain
short term solvency etc. are the main areas diagnosed from the analysis of distinctive
characteristics of the members of this cluster. Individual investors belonging to this cluster have a
futuristic and enterprising attitude towards financial decision and create portfolio to reap
maximum financial return and wealth generation. High saving propensity, preference of short
turn gain heavy usage of credit card, interest for active participation in secondary market etc. are
the prominent financial attitude of individual investors of this cluster. They are excellent financial
decision makers having deep knowledge on the functioning of capital market and share price
movement and always maintain aggressive approach in Investment activity.

Managerial implications of the study

The result of risk tolerance analysis is very important from a managerial point of view,
especially for portfolio managers of mutual fund to develop innovative financial products. As per
the financial planning ·fundamental, the mutual fund manager has to ascertain risk tolerance of
different group of customers to design and market suitable financial package in accordance with
the customers' risk tolerance. The risk associated. The risk associated with holding common stock
in portfolio in really the likelihood that the expected return will not materialise. Since individual
investors reaction to judgment about uncertain events and establishing sense of the probability of
future have systematic bias and distortions in the financial behavior and approach of the
individual investors may not be realistic and judicious. Keeping in mind these realities the policy
makers and authorities in financial market should endeavor to investigate different dimensions
of the issue to have a balanced and judicious understanding different problems faced by
individual investors. Even though scientific qualification and measurement of risk associated
with portfolio decision is practically difficult, the authorities at the top of the financial system
may seriously review this complex issue in the financial market and initiate measures that build
necessary confidence and rationally in the financial behavior of individual investors.
CONCLUSION
The findings of the study unambiguously reveals that the risk tolerance of individual investors
strongly influence the portfolio decision and certain demographic characteristics of individual
investors, make remarkable variations in the level of risk tolerance, portfolio selection and
financial preference by individual investors. The investment in securities and portfolio decision
is futuristic oriented and emotional and naturally subject to cognitive biases. One of the notable
findings that should born in mind is that individual investors do not react consistently when they
face risk in portfolio decision. More importantly, in general individual investors seek risk to
avoid loss which is certain albeit avoid risk while seeking gain. This disproportionality of
individual’s risk tolerance as compared to pleasure in getting financial gains may lead to
unrealistic approach in portfolio decision leading to inefficiencies and state of confusion and lack
of order in the capital market and reduction in wealth of investors. Therefore financial behavior
and risk tolerance of individual investors may be appropriately transformed to make portfolio
decision sensible logical and judicious. The superior brain and market intelligence alone do not
guarantee generation of extra financial gain from capital market rather emotional maturity
manifested in balanced risk tolerance, diligence, patience and contrary thinking positively help
individual investors to have sensibility and confidence to enter capital market which make
possible creation of millions of equity centric portfolio by investors that will strengthen Indian
financial system and enhance prosperity and welfare of one and all.
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