Financial Literacy and Portfolio Diversification Among Individual Investors in Nepal

Abstract

Background: Portfolio diversification is allocating wealth across assets with imperfectly correlated returns in order to reduce exposure to asset-specific risk. However, individual investors may not always construct diversified portfolios, and financial knowledge may be an important factor underlying this issue. The current study examined the relationship of financial literacy with portfolio diversification among individual investors in Nepal.

Method: This study used a cross-sectional survey. Based on the primary data collected from 296 individual investors in the Kathmandu Valley having investment in financial instruments listed on NEPSE, the study employing Binary logistic regression to estimate the likelihood of holding a diversified portfolio

Results: The results of this study indicate that financial literacy is positively associated with portfolio diversification (B = 0.726, p = .001, OR = 2.067, 95% CI [1.336, 3.198]). Thus, holding other variables constant, respondents with higher financial knowledge had approximately twice the odds of being classified as diversified.

Conclusion: The findings support the view that financial literacy is relevant to portfolio diversification of investor in Nepal

Novelty: The study contributes evidence from an emerging capital-market context and highlights the importance of education that goes beyond general financial awareness toward practical understanding of diversification.