Importance of behaviour while investing in MFs

There are two ways in which not only investment decisions, but any decisions for that matter, are taken, one is an emotional way and other is a rational way. In true sense, the rational way is the one which is acutely the right way. However, practically it is not possible to completely think in a rational way. We always will have some emotions attached while making investment decisions.

To understand it better let us take an example which shows our emotions taking charge while making decisions. It happens a lot of time when we invest. Mostly it's because some of our friends, colleagues or relatives are investing and we make investment decisions based on that, which in behavioural finance is known as herd behaviour. This decision of following what others are doing is psychology that we all unknowingly follow in our day-to-day lives. Say, you are into a new city and wish to go to a restaurant, but you don’t know much about this city. Then in this situation, you won’t take time to think much over it before making any decision. Rather what you will do is you would look where there is more rush and choose that restaurant. This decision was taken with thinking that more people are visiting this restaurant then there is something nice about it.

However, while ordering food, if not all, many usually display rational behaviour. They think about their mood, then what are the toppings or dips that are served along with the dish, the ambiance, what is the price range of the dishes offered. So, here comes your rational thinking. Even while you invest in MFs this is important. As you would first look at your requirement and time horizon, then you would check what kind of risk you would be able to digest, then you will decide the category of funds that would suit your time horizon and risk appetite, then you would individually have a look at funds in that particular category and the screen them based on the returns, risk, etc.

It is very important to understand how you are taking decisions while investing. If emotional factors are driving your investment decisions then you can seek the advice of your financial adviser before making such decisions to avoid a possible disaster.