Financial literacy and its Impact on Investment decisions for investors in UAE
The economy of UAE has evolved substantially within the past few decades. It is a modern-day marvel to witness the growth of the nation from a dessert to a global business hub. With the growth of the nation’s economy, there has been an increase in the financial literacy of the investors in UAE. Financial literacy in recent years has caught the attention of various government departments, financial institutions, employers, bankers, community interest groups, etc.
Recent statistics indicate an increase in the real gross domestic product per capita of the country. The growth of the economy and the increase in the gross domestic per capita of UAE has resulted in the financial growth of locals and expatriates residing in the UAE. Furthermore, the banking industry is highly competitive in the UAE which makes it extremely easy to get credit in the UAE.
All the factors mentioned above make it extremely vital to improving the spread of financial education in the country. Even in developed countries like the USA, UK and Japan have low levels of technical financial education.
Financial literacy can be defined as providing information and familiarity with a technical understanding of the financial market especially the rewards and risks associated with the investment with the objective of making well informed financial decisions. Financial literacy is beyond the provision of financial advice and information. The primary objective of any discussion on financial literacy is to increase the knowledge and skill set of an individual who has limited resources to understand the nuances of financial dealings.
Importance of Financial literacy
The financial growth and well-being of an individual are directly dependent on the level of their financial literacy. Financial literacy is not just limited to the basic understanding of investment vehicles but it also involves the complex understanding of various processes by which an investor chooses a particular investment tool.
Within the past few years, investment vehicles available in the market for investors in UAE have become highly complex. Due to this, the importance of financial literacy has increased significantly. In order to promote well-structured and organized investments, financial literacy plays an inevitable role. Moreover, it helps to reduce information asymmetry that exists between markets and investors in UAE.
The ladder to financial stability begins with financial literacy because without a firm understanding of finances it is near about impossible to make correct investments and thereby achieve your financial goals.
UAE based financial researchers Hussain A. Hassan Al-Tamimi and Al Anood Bin Kalli published a research paper that indicated that financial literacy in the UAE is below the required level. Furthermore, the research paper also sheds light on the relationship between financial literacy amongst investors in UAE and the influence of factors that affect investment related decisions. According to the research paper, the levels of financial literacy were lower amongst women when compared to men in the country.
Financial literacy and its impact on portfolio diversification for investors in UAE
Portfolio diversification refers to investing in different investment vehicles that are inversely related to each other. Diversifying the investment portfolio of investors in UAE mitigates the risk of loss of capital and helps them to build a diverse investment portfolio.
Financial literacy and portfolio diversification have a positive relationship with each other. Investors in UAE with considerable levels of financial literacy tend to have a well-organized and diversified investment portfolio in comparison to investors with lower levels of financial literacy.
Investors in UAE with inadequate financial literacy tend to invest their money in a conservative way that does not diversify their investment portfolio making it prone to market swings.
Relationship between financial literacy and investment decisions
Financially literate investors in UAE be it locals or expatriate residents are more successful in making better investment related decisions. The primary reason behind the fact is that deep knowledge and understanding of concepts of investment helps them to assess various detrimental factors that are responsible for building a strong investment portfolio.
It has been observed that online investors are more informed and literate that conventional investors in UAE. Traditional investors rely on information gathered from conversations, colleagues, agents, etc. Online investors are subjected to less exposure to misinformation and manipulation of financial statistics when compared to traditional investors in UAE.
Risk tolerance capacity, long term financial goals, the risk to return ratio, time horizon are some of the important factors that are to be considered while choosing an investment vehicle to park extra income. The right way to build a strong investment portfolio is to first assess the mentioned factors for an investor in UAE. After thoroughly assessing and analyzing these factors investors should look for the most suitable investment vehicle that matches their risk profile and offers required rates of return.
Financial awareness and knowledge have always been significant in order to make well informed financial decisions. With dynamic developments and financial well-being a part of education systems in some countries the scenario might change. However, financial literacy as an investor in UAE is extremely vital to generate and accumulate wealth.
It is clearly evident that financial literacy is vital in order to make the right investment decisions for investors in UAE. Based on statistics and reports we can conclude that the level of financial literacy is below the required levels therefore the government should actively contribute in order to improve financial literacy amongst investors in UAE.
Spreading financial literacy will not only benefit investors in UAE but it will also help the government to improve the economy by the contribution of investors in government based schemes. There are several factors based on financial literacy that affect investment decisions of investors in UAE but there are multiple factors that come from behavioural finance and have a huge impact on investors in UAE.