Common Behavioural Biases That Affect Mutual Fund Investments

You're about to invest in a mutual fund. You've read the reports, seen the charts, and even talked to your distributor. But then, doubt comes up.

What if the market crashes? What if there’s a better option? You hesitate. Or worse, you make a rushed decision just to feel safe.

Sound familiar?

That hesitation, rush and fear, are all signs of behavioural biases.

What is Behavioural Bias

A behavioural bias, a set of beliefs, expectations and assumptions influence your investment decisions, which may lead them to make uninformed decisions. In order to maximise investment strategies and achieve long-term financial goals, it is essential to understand these biases.

Some Common Behavioural Biases are as follows:

1. Loss Aversion

You're reviewing your mutual fund portfolio. One of the funds is clearly underperforming. You know it's time to remove it, but you have second thoughts. That is the fear of booking a loss.

This is loss aversion. Our tendency is to fear losses more than we value gains. You end up holding on, thinking it will bounce back, while better opportunities pass you by.

You stay invested in a poor-performing sectoral fund, instead of switching to a well-diversified equity fund that could offer better returns.

How to deal with it:

• Use asset allocation to balance risk and returns.
• Set clear investment rules and follow them.
• Think long-term: goals matter more than short-term setbacks.

2. Choice Paralysis

You're ready to invest. You open your app and suddenly gets confused by all mutual funds options. Large-cap, flexi-cap, ELSS, sectoral… What now? You stop and exit the app without investing a rupee.

That’s choice paralysis, when too many options overwhelm you, and you end up doing nothing.

You delay investing because you're afraid of picking the "wrong" fund. Meanwhile, the market moves on and your money sits idle.

How to deal with it:

• Set clear criteria based on your goals, risk appetite, and investment timeline.
• Use filters like fund performance, expense ratio, and consistency.
• Start small with SIPs. You can always tweak later.

3. Recency Bais

A mid-cap fund delivers 20% returns over six months. You are ready to invest in it, thinking the momentum will last forever. Sound familiar?

That’s recency bias.  Assuming that recent performance is a guarantee of future success.

Another example is rushing into a trending mid-cap fund without checking if it fits your long-term plan or risk appetite.

How to deal with it:

• Focus on your fundamentals, not hype.
• Use metrics like the Sharpe Ratio and Alpha to evaluate risk-adjusted returns.

4. Herd Mentality

Your WhatsApp group with your closest buddies is buzzing about a new NFO. You don’t want to feel left out, so you invest it.

Another instance can be jumping into a sector fund just because it's trending without understanding your investment goals or risk tolerance.

That’s herd mentality because you are investing in a specific investment option because others are doing it, and you don’t want to be left alone.

How to deal with it:

• Stick to your asset allocation plan.
• Only invest in sectoral or thematic funds if you truly understand them.
• Trust your research and strategy.

5. Confirmation Basis

You invest in a tech fund. Now, you only read articles that support that tech fund future growth. You ignore signs of overvaluation or rising competition. This is confirmation bias. Seeking out info that supports what you already believe.

How to deal with it:

• Make a habit of seeking out opposing views.
• Follow diverse voices: analysts, platforms, opinions.
• Base your choices on data, not gut feelings.

Conclusion

Behavioral biases are natural and often subconscious, but when left unchecked, they can affect your investment decisions. These common pitfalls can be avoided by applying disciplined strategies such as asset allocation, goal-based planning, diversified research, and data-driven decisions.