The Mediating Role of Risk Tolerance in the Relationship between Financial Literacy and Investment Performance

Abstract

The main objective of this research paper is to study the impact of financial literacy on investment performance, with the mediating effects of risk tolerance. Data was collected using a standardised questionnaire from 203 individual investors in Chennai, India and the results indicate that there is a significant positive relationship between financial literacy and investment performance while the level of risk tolerance is partially mediating that relationship. This study is the first of its kind which has explored the mediating role of risk tolerance, and it demonstrated that higher levels of financial literacy make investors more tolerant towards risk which in turn makes a better and satisfying investment performance. This study has several implications for investors, financial advisors and policymakers. It also aids in understanding the significance of financial literacy for the investors and ameliorating awareness and intention to invest among the non-investors.

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