The effect of financial literacy on long-term recognition and short-term trade in mutual funds: Evidence from Japan

Abstract

We explore how financial literacy affects mutual fund investments through unique survey data from a broad spectrum of Japanese households. Our evidence reveals the dual effects of literacy on investments over long and short horizons. While the acquisition of financial knowledge promotes long-term investment in mutual funds, it also has the side effect of encouraging short-term investment. Specifically, people with high financial literacy share a fundamental recognition that mutual funds are suitable for long-term wealth creation. However, highly literate people intend to sell mutual funds immediately after short-term price appreciation, which could lead to frequent trading turnover. This is consistent with the knowledge bias effect whereby knowledgeable people falsely react to information, contrary to long-term investments.