Hello Readers!
Financial Decisions by humans, whether it is regarding their expenses, budgets, or investments, all these are directly based on mental and emotional biases. The mental biased decision is generally taken based on established ideas that may be factual or not. While the emotionally biased decision is generally based on personal feelings that occur instantly while investing.
Well, many of the common investment biases lead to inaccurate judgment regarding investor’s investment, which can prove harmful for their portfolio, and therefore, it is a must for an investor to ignore these investment biases.
Let us know about these common investment biases that can be harmful to one’s portfolio.
1. Herd Mentality
People have a common habit of following what others do, especially they prefer to do those works that have to prove beneficial to others. The same mentality they apply to their investments also. Investors follow what others are doing instead of using their own discretion and analysis. This often creates pressure to earn more among them. Investors plan their investment in equity mutual funds when they see their friends or relative is making big from Equity funds and end up taking the high risk that what their risk profile allows. Their herd mentality grips their investment more with the risk and less with returns.
2. Loss-Aversion Bias
Many investors have a bad habit of suffering from the pain of loss, instead of enjoying the gains. They easily get affected by the correction shown by a fund but hardly get happy from the maximizing gains from their investment. Assume an investor invests equally in two stocks ‘A’ and ‘B’. And stock ‘A’ goes up by 50%, while ‘B’ goes down by 50%. The investor is likely to feel the pain of the correction of stock ‘B’ more than the appreciation of stock ‘A’.
This is popular as Loss-Aversion Bias. This investment bias can often force investors to take adverse decisions for their investments, not only this, due to this bias, many investors favor sticking to traditional instruments like fixed deposits instead of Equity mutual funds. However, investors need to understand that Fixed deposits offer fixed returns, while Equity mutual funds offer returns taking inflation into consideration.
3. Recency Bias
Investor when they are in process to pick out a fund to invest, they generally search for the funds performing on the top and giving the best returns at that instant in the market. However, they do not mind to even check the fund’s consistency in its performance over the long-term and start investing in the best return giving funds.
These kinds of investors who often get swayed by the recent returns of the funds, end up selecting a fund that is not compatible with their investment strategy and risk profile, they believe that funds that are leading the market today will rule tomorrow also.
These are some of the investment biases that often prove to be harmful to one’s portfolio. It is said that just because you are prone to some kind of investment biases, doesn’t mean that you need to apply these biases while taking your investment decisions. You must work certainly on these kinds of investment biases, and instead of taking your investment decision on these, you must follow a rule-based approach.
Invest For A Specific Goal Always
It is always advisable to investors when you plan to invest in mutual funds, do plan it for your specific goals. Investing for a goal helps you work towards its corpus by saving and by rationalizing your spending.
Do It via SIP (Systematic Investment Plan)
Timing the market and then finding out the right moment to invest is a lengthy process, you would have to give your whole day in keeping an eye on the market. Well, why not easy this process with a simple and easy way of investing in mutual funds via SIP. SIP is one of the best ways to participate in equity mutual fund and managing the volatility associated with them, through Rupee Cost Averaging.
Invest For A Long-Term
Staying invested in the long-term helps your fund to equalize all the ups and downs of the market during your investment period and let the power of compounding work its wonders. So, invest in equity mutual funds via SIP for the long term.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).