Household investment decisions: Determinants of portfolio allocation

Abstract

This contemporary concerns study looks at household investment decisions focusing on factors which determine portfolio allocation decisions at a household level. The objectives were to identify the variables which determine household investment choices in the Indian context, both through secondary and primary research, and then to create a model that possibly predicts saving decision and portfolio choice based on investor profiles. The first phase involved a literature review of existing research to identify the key variables that are important in this context. Through secondary research it was found that the factors that influenced portfolio allocation decisions at a household level can be divided into two: Investor characteristics and External factors. Investor characteristics are economic, demographic, psychographic and sociological characteristics of the investor, who in this context will be the investment decision maker or head or the household. The economic variables, that we found important, were wealth and income levels of the household; demographic variables were age, gender and level of education; psychographic variable was risk appetite, tendency or propensity to seek financial advice and sociological aspects were investing behavior of the investor’s friends and family (parental). External factors were characteristics of the economy, of the regulatory and financial environment that the investor was making its decisions in. These include relative risk – return tradeoffs of assets, borrowing constraints, tax Incentives, liquidity constraints, minimum purchase requirements, advent of internet and technological progress and the level of financial regulation etc. The second phase involved conducting primary research. An investor profiling questionnaire was designed that focused on the investor characteristics identified in secondary research phase. We also conducted interviews and a focus group discussion to get more in depth inputs. The results of this primary research were used to test the hypotheses regarding relationships between investor behavior and characteristics, which we had identified through secondary research. The hypotheses that we tested were: Influence of gender on risk appetites: Most women we Influence of gender on risk appetites: surveyed tended to be more risk averse than men. Outlook on markets: Most people seemed to have a posi Outlook on markets: tive outlook regarding the performance of equity stock markets. Investors in the younger age bracket were found to have a higher proportion of positive outlooks than people in older age brackets. Decision making: Most people in the younger age brac Decision making: kets tended to manage their own investments, and the proportion decline in the older age groups. Knowledge of finance: People with a familiarity wit Knowledge of finance: h the financial markets were more likely to handle their own investments. Portfolio allocation: Most people had some amount o Portfolio allocation: f investments in savings deposits, fixed and term deposits, and provident funds. Relatively lesser people invested in equity stocks, although more than those who invested in mutual funds. Professional advice: People who have sought profess Professional advice: ional advice are more likely to have a higher allocation to riskier assets. Availability of advice Availability of advice of advice: People who stayed at homes were more likely to have made investments in tax savings schemes. Entry points in investment: People used their first Entry points in investment: salaries to purchase physical assets like durable (TV, refrigerators, laptops/computers), two wheelers etc. Active investors: Men trade more actively than wome Active investors: n. People who have access to professional advice are more active traders. People with a familiarity with the financial markets were more active traders. Investment appetite of people with their Investment appetite of people with theirown businesses: own businesses: own businesses: They were less likely to invest in financial assets, and preferred to put money in their own businesses. Information source: The most preferred source of fi Information source: nancial information and advice was friends, then family, professionals, news channels, newspapers, in that order. Financing investments: Most preferred financing sou Financing investments: rce for investments was personal savings, then loans from family and friends and the least preferred was bank loans. Demat accounts and investing behaviour: Not owning Demat accounts and investing behaviour: a Demat account was often a deterrent in investing in a, suddenly materialized, opportunity. The most significant application of this paper can be targeted investment plans for different individuals based on his or her profile. In this paper, a model has been constructed using which a person’s propensity to hold more than 20% of stocks can be determined. This involves logistic regression and the data gathered through primary analysis is used for this model. A similar analysis can be done for other investments as well. Based on such models, a bank can determine what sort of investment is most likely to attract an individual based on his or her profile. A bank has access to its customers profile and saving amounts. This information can be used to determine risk appetite levels and idle investment plans, and generate higher customer engagement for the bank of financial institution.