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Ms. Rachna Anand
Maharaja Agrasen Himalayan Garhwal University
Uttarakhand, India
ORCID id – https://orcid.org/0009-0001-0285-6297
Abstract— Financial literacy—knowledge and understanding of financial concepts enabling informed decision-making regarding personal finances—substantially influences household investment behavior and long-term financial outcomes. This manuscript examines relationships between financial literacy and investment decisions, mechanisms explaining how knowledge affects behavior, and evidence regarding financial literacy interventions’ effectiveness. Research demonstrates that financially literate households make more diversified investment choices, exhibit lower portfolio risk, and achieve better long-term returns compared to less literate counterparts. However, financial literacy alone proves insufficient for explaining investment behavior; behavioral factors including loss aversion, overconfidence, and herd behavior substantially influence decisions alongside knowledge. This manuscript synthesizes literature examining financial literacy’s effects on investment behavior, identifies moderating behavioral factors, and evaluates financial literacy education effectiveness. Findings indicate that comprehensive financial literacy education integrating behavioral insights and practical application represents more effective approach than traditional knowledge transfer. Additionally, structural and institutional factors including access to investment vehicles and professional advice substantially shape investment outcomes independent of individual literacy levels. The analysis concludes that improving household investment outcomes requires combined approach addressing knowledge gaps, managing behavioral biases, and restructuring institutional environments facilitating better decisions.
Keywords: financial literacy, investment behavior, household finance, financial education, behavioral finance, portfolio decisions
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