Perspective of Individuals on Personal Financial Planning

Transcription

1 Perspective o Individuals on Personal Financial Planning Ms. Tulsi Raval Assistant Proessor, Sunshine Group o Institutions, Rajkot - tulsiraval_84@yahoo.com Abstract: Planning or a secure inancial uture is not easy. Most individuals are aware that inancial planning is critical, yet don t they have time or the expertise to develop a plan and make the needed inancial decisions. Financial planning is about developing strategies to help individuals manage their inancial aairs and meet their lie goals. By investing in dierent investment avenues one can take the advantage o diversiication and can earn more with less risk. The number o inancial products and their complexity has increased considerably. The inancial service providers are generating a plethora o inormation on personal inance issues which need analysis rom the viewpoint o risk, liquidity and appropriateness apart rom comparison within and across classes o such products. The cost o living and aspirations have gone up putting pressure on income, which has to generate the best return under the given circumstances. The increasing complexity o inancial products makes it imperative or an individual to seek expert opinion in managing one's inances in a disciplined manner. Key Words: Financial Literacy, Financial Planning, Risk, Objectives 1. INTRODUCTION: Assuming investors have well-deined goals, they can take one o two major paths to achieve them. One is to acquire the knowledge needed to do one s own inancial planning and investing. Another is to use the services o an investment proessional such as a inancial planner or adviser who already has the requisite knowledge, skills, and abilities to carry out these important tasks. Both options involve trade-os, but each oers the potential or long-term success. Successul inancial planning and investing are much more than crunching numbers, listening to popular opinion, and understanding the latest market trends. As much as people need to know about inancial markets and investments, they also need to know about themselves. A large part o investing involves investor behavior. Emotional processes, mental mistakes, and individual personality traits complicate investment decisions. 2. FINANCIAL LITERACY OF INVESTORS: Financial literacy o investors depends on investors ability to understand the key inancial products viz. stocks, bonds, mutual unds, various saving plans etc. and basic inancial concepts viz. compound interest, investment return, risk, diversiication etc. Based upon this ability, individual investors take inancial decisions about saving, spending and managing debt. Singer and Singer (1985) dierentiated between two sets o decision makers: economists and psychologists. Economists seek to explain the aggregate behavior o markets, psychologists try to describe and explain actual behavior o individuals. (1985, p. 113) Even scholars rom behavioral inance do not necessary ocus on the individual decision maker or instance; De Bondt and Thaler (1994, 1995) ocus their review on inancial decision-making on markets and irms rather than on the individual i.e. the proessional investor. In regards to the decision-making process, standard inancial theory makes the assumption that investors behave rationally and that under most conditions o risk, people make inancial decisions based on their own approach towards risk and to the actual degree o risk. However, several academic studies have shown that this investment decision-making process is not yet thoroughly signiicant to describe inancial decision behavior. Behavioral inance assumes a vital aspect o the investment decision-making is the subjective aspect o perceived risk by the investors rather than the objective risk emphasized by standard inance scholars. Thus, by recognizing the subjective nature o an individual s own perception o risk as a supplement to the traditional measures o objective risk broadens the understanding and improves the overall area o risk judgment (measurement). Finance scholars as well as investment proessionals recognize that how individuals perceive risk might inluence stock prices. According to Farrelly and Reichenstein (1984), it is individuals perception o, and ultimately their reaction to, risk that aects stock price. (p. 6). In other words, actual risk is not the only aspect how investors perceive and react to that risk is also a signiicant actor. 3. INVESTORS PERCEPTION OF RISK: Risk is a distinct attribute or each individual or the reason that what is perceived by one person as a major risk may be perceived by another as a minor risk. Risk is a normal aspect o everyone s daily lives; there is no such thing as a judgment with zero risk or without a degree o uncertainty. Risk perception is the way people see or eel Available online on Page 59

2 regarding a potential danger or hazard. The concept o risk perception attempts to explain the evaluation o a risk situation (event) on the basis o instinctive and complex decision making, personal knowledge and acquired inormation rom outside environment i.e. dierent media sources. Sitkin and Weingart (1995) deined risk perception as an individual s assessment o how risky a situation is. Victor Ricciardi: A Risk Perception Primer 18 explained risk in terms o probabilistic estimates o the degree o situational uncertainty, how controllable that uncertainty is, and conidence in those estimates. (p. 1575). Human judgments, impressions and opinions are ashioned by our backgrounds, personal understanding, and proessional experiences. There are a substantial number o actors that inluence an investor s risk perception and there has been an ever- growing body o research that has attempted to deine risk, categorize its attributes and comprehend these various issues and their speciic eects (Slovic, 1988). In some academic circles, it has been acknowledged that perceived risk might be o more signiicance that actual risk within the decision making process. 4. RESEARCH METHODOLOGY: The research ramework o the study comprises o objectives, hypothesis, methodological ramework, analysis and interpretation o the data. 5. RESEARCH OBJECTIVES: To ind out the relation between demographic actors (e.g. education) and level o risk taken by the investors. To ind out individual preerence o investors or the investment objectives. To ind out the opinion o the investors or personal inancial planning. 6. METHODOLOGICAL FRAMEWORK: Research Design: Descriptive (using survey method) Source o Data : Primary Data Research Tool : A structured questionnaire Sample Selection and Sample Size: Convenience sampling is used to get inormation rom 300 individual investors. Table 1: Education Qualiication o Respondents Qualiication No. o Respondents % o Total Respondents Under Graduate Graduate Post Graduate Above Post Graduate Table 2: Level o Investment Risk Taken by Respondents Level o Risk No. o Respondents % o Total Respondents High Medium Low Zero Research Hypothesis 1: H0: Education Qualiication and Level o Risk taken by respondents is independent o each other. Ha: Education Qualiication and Level o Risk taken by respondents is dependent on each other. Available online on Page 60

3 Education Level o Risk Qualiication High Medium Low Zero Total Under Graduate Graduate Post Graduate Above Post Graduate Total Degree o reedom = (c-1)*(r-1) = (4-1)*(4-1) = (3)*(3) =9 So, table value at 5% signiicance level is ( o e o e ( o e ) e) = = As the tabulated value is more than the calculated value null hypothesis is accepted. So we can say there is no relation between education qualiication and level o risk taken by the individuals. Table 3: Preerence or Investment Objectives Most preerred Investment No. o Respondents % o Total Respondents Objective Saety o Principle Amount Growth in Amount Invested Generate Income Tax Exemption Liquidity e Available online on Page 61

4 Research Hypothesis 2: H0: There is no speciic dierence among the investment objectives o the investors. Ha: There is speciic dierence among the investment objectives o the investors. There are 5 categories, so the degree o reedom is k-1 = 5 1 = 4 Expected requency ( e ) = 300 = 60 5 So, table value at 5% signiicance level is Most preerred Investment Objective o e ( e) e Saety o Principle Amount Growth in Amount Invested Generate Income Tax Exemption Liquidity Total As the tabulated value is less than the calculated value null hypothesis is rejected. So there is speciic dierence among the investment objectives o the investors. Table 4: Opinion or Personal Financial Planning Opinion or Personal Financial Planning Do you achieve your inancial goals by your personal inancial planning? Do you ind that your inancial situation is out o control? Is your investment decision matched with your inancial needs? Do you use proessional services or tax planning? Are you satisied with your personal inancial planning? Always Mostly Sometimes Rarely Never Total CONCLUSION: Understanding undamental human tendencies can help inancial planners and advisers recognize behaviors that may interere with their clients achieving their long-term goals. Although individuals cannot prevent all behavioral biases, investment proessionals can advise clients how to reduce their inluence during the inancial planning process. This requires gaining an understanding o the clients psychological biases, resisting the inclination to engage in such investor behaviors, and establishing and implementing Available online on Page 62

5 disciplined investment strategies and trading rules. An important strategy is to invest or the long-term, identiy the client s level o risk tolerance and risk perception, determine an appropriate asset allocation strategy, and rebalance the investment portolio on a yearly basis. REFERENCES: 1. Rohrmann, B. & Renn,O (2000). Risk perception research: An introduction. In B. Rohrmann and O. Renn (Snelbecker, G. E., Roszkowski, M. J.& Cutler, N. E. (1990). Investors risk tolerance and return aspirations and inancial advisors interpretations: A conceptual model and exploratory data. Journal o Behavioral Economics, 19(4), Thaler, R. H. (1999). Recent advances in behavioral inance: A critical analysis. A Videotape o the Conerence by the Berkeley Program in Finance, Silverado Country Club: Napa, Caliornia, November 7-9, Weber, E. U., Blais, A., & Betz, N. E. (2002). A domain-speciic risk-attitude scale: Measuring risk perceptions and risk behaviors. Journal o Behavioral Decision Making, 15, Stone, R. N. & Gronhaug, K. (1993). Perceived Risk: Further Considerations or the Marketing Discipline. European Journal o Marketing, 3, Groenland, E. and E.Nyhus, (1994) Determinants o time preerence, saving, and economic behaviour. A comparison between Norway and The Netherlands, Paper prepared or IAREP/SABE conerence. Erasmus University Rotterdam, July 10-13, pp Sitkin, S. B. & Weingart, L. R.(1995). Determinants o risky decision-making behavior: A test o the mediating role o risk perceptions and propensity. Academy o Management Journal, 38(6), Lea, S., P. Webley and C. Walker (1995), Psychological actors in consumer debt: money management, economic socialisation and credit use, Journal o Economic Psychology, Vol. 16, pp Groenland, E. and E.Nyhus, (1994) Determinants o time preerence, saving, and economic behaviour. A comparison between Norway and The Netherlands, Paper prepared or IAREP/SABE conerence. Erasmus University Rotterdam, July 10-13, pp Available online on Page 63