3 biases to avoid while investing in MFs
Behavioral bias, being a complex phenomenon that many researchers around the world are studying meticulously, is a result of our emotions. If we look at even our day-to-day buying decisions, we carry many biases. Like brand bias, you may purchase a product of a particular brand even if there are many other better options available in the market. This is usually due to the brand value that you find in that product. Similarly, while investing in mutual fund you may come across such biases. But you need to shed these biases to avoid any kind of loss of your money.
Anchoring bias
This bias is related to the beliefs that we all may carry. However, when these beliefs and ideologies become strong, people tend to ignore all other things that don’t align with the belief or ideology. Say for example, an investor who saw great returns from a mutual fund and invested in it, exits it with a loss when market went through a correction or a downturn. Here the bias was that the investor was under an impression that the mutual fund investments would never fall. So, it is important while investing in MFs to keep this bias at bay for better results.
Recency bias
This is one of the common biases found among MF investors. Here, people rather than taking into consideration the actual past, take investment decisions based on recent activities. When the markets are making new highs and your MF investments are also following the same, you may think that your risk appetite is increasing and hence, you allocate maximum fund towards equity MFs. This is because you feel the markets would remain bullish. It is only when the markets turn bearish that you realize, rather than making money you have lost some. So, avoiding recency bias is important. Following an asset allocation and rebalancing it periodically would help you to stay away from recency bias while investing in MFs.
Herd mentality
This is also another popular bias that investors carry with them while investing in MFs. Herd mentality is something when you follow others without doing adequate research yourself. This is most common even among the investors who get recommendations from the research houses. These recommendations are generic and may or may not suit your investment needs and risk appetite. So, it is always advisable to do a self-research before investing in MFs even though you have received the recommendations from the research houses.