Financial Literacy And Investment Decision-Making Behaviour Among Retail Investors: A Conceptual Study

Financial literacy has emerged as an important determinant of individual financial behaviour, particularly as retail investors increasingly participate in a wide range of financial products through banks, mutual funds, securities markets, insurance companies, pension schemes and digital investment platforms. The ability to understand interest rates, inflation, risk, return, diversification, compounding, liquidity and investment costs can influence how individuals evaluate alternatives and make investment decisions. The present conceptual and descriptive research paper examines the relationship between financial literacy and investment decision-making behaviour among retail investors by integrating relevant theoretical perspectives and findings from previous studies. The paper draws upon the human capital perspective of financial literacy, the Theory of Planned Behavior, Prospect Theory and Behavioural Finance concepts to explain how knowledge, attitudes, perceived control and psychological biases may jointly influence investment behaviour. A descriptive research design based on secondary literature has been adopted. Relevant academic studies, theoretical contributions and institutional literature were reviewed to identify major dimensions of financial literacy and their implications for investment decision-making. The review indicates that financial literacy can improve investors’ ability to understand financial products, evaluate risk and return, diversify investments and make more informed portfolio decisions. However, financial knowledge alone does not necessarily guarantee rational investment behaviour. Overconfidence, loss aversion, herd behaviour, familiarity, excessive trading and other behavioural biases can affect investment decisions even when investors possess adequate financial knowledge. The paper therefore proposes an integrated conceptual framework in which financial literacy directly influences investment decision-making while risk perception, financial attitudes, investment experience and behavioural biases potentially strengthen or weaken this relationship. The study concludes that improving retail investors’ financial literacy should involve not only knowledge enhancement but also development of practical decision-making skills, risk awareness and behavioural discipline.