Financial Risk Tolerance of Individual Equity Investors in Indian Stock Market

Abstract

Financial markets offer a wide choice of asset class and financial instruments to investors to meet their investment objectives. Investors must consider not only the market mood and the required return but must ascertain the risk involved in committing the funds. Apart from this, they must have an accurate measure of their risk tolerance as risk is pervasive in all financial pursuits. The uncertainty surrounding the financial markets gives birth to risk. Therefore, understanding the financial risk tolerance behaviours of individual equity investors in a fast growing economy like India is vital for policy makers, regulators like SEBI, professional portfolio managers and the individual retail investors. The present study employs Grable and Lytton (published in Financial Services Review in the year 1999) thirteen item instrument for assessing financial risk tolerance of 802 respondents. The two risk tolerance categories, namely; Below Average Risk Tolerance Category and Above Average Risk Tolerance Category vary significantly in their attitude and tolerance towards risk with mean FRT scores of 24.01and 33.08 respectively. Of the demographic variables, gender depicts that females are less tolerant to risk primarily in Below Average FRT category. Risk tolerance is also influences by education level. The lower income groups depict lower tolerance towards financial risk supporting the assertion the low income people get naturally risk averse. Risk tolerance substantially increases with increase in investors’ investment experience. It may be inferred that demographic variables play an important role in deciding the financial risk tolerance levels of individual equity investors in India.