Many investors buy the same mutual funds as everyone else. They often ignore their financial goals or risk profiles. Instead, they follow trends, media buzz, or advice from friends and family. This behaviour is called herd mentality. It is a typical psychological pattern in investing.
If investors follow the crowd, they may ignore the risk-appropriateness issue. They might blame the product or distributor if the market suddenly changes.
When investors notice a popular fund with high short-term returns or see it recommended on social media and TV, they feel a sense of safety. They think, “If so many people are investing, it must be good.” This thought eases the need for independent research. It also affects financial decisions. This is called herd behaviour, and it is a psychological human nature behaviour.
However, popularity is not a reliable sign of performance. By the time a fund gains popularity, its best performance might already be over. Still, investors often choose the comfort of following the crowd.
Many investors tend to select funds based on past 1-year or 3-year returns. They search for top-performing schemes and believe that those numbers will continue. Unfortunately, chasing returns is a common and dangerous pattern.
Distributors often come across clients asking, “Which is the best fund this year?” or “I read that this fund gave 30% last year. Can I invest in that?” The problem is that this approach ignores several critical aspects: investors’ risk tolerance, investment goals, and investment horizon, among other things.
Mutual funds are market-linked products. Past performance is not a guarantee of future returns. Yet, because of peer influence, media lists, or online forums, investors often jump into a fund that has already seen a run-up, sometimes, leads to lower future returns or higher volatility.
In behavioural finance, “social proof” is a powerful concept. It refers to the tendency of people to imitate the actions of others in uncertain situations. In financial markets, uncertainty is a constant. So when investors feel unsure about where to invest, they look for visible cues, news headlines, top fund rankings, or what others in their network are doing.
This leads to a situation where decisions are made not on fundamentals, but on perception. For example, a scheme may suddenly get large inflows just because it gets media attention or because a few investors made profits in the short term.
From the MFD’s point of view, this is both a challenge and an opportunity. A challenge, because it is hard to talk someone out of a decision driven by emotion. But also a chance to educate and guide the investor towards more rational, goal-based investing.
One more trigger that is usually seen in a herd's behaviour is FOMO - a fear of missing out. Investors see others making money in a particular scheme or category and fear that if they don’t act now, they will be left behind.
That results in decisions which are not thoroughly thought out, like:
In this scenario, the emotional decision wins over the rational one, and the investment discipline is in the background.
Therefore, to mitigate this, MFDs need to make sure their clients stick to the basics. They can also highlight their original investment goals and risk appetite, as well as give examples of diversification to ensure clients don’t react.
Today, with apps, influencers, and YouTube channels offering instant “tips” and fund recommendations, investors generally opt for this. While access to information is a good thing, not all information is accurate, relevant, or suited to the individual investor’s profile.
Many investors go with what seems most convincing, especially if it's backed by significant numbers or trending charts.
MFDs must position themselves as credible in this environment. By offering context, simplifying fund comparisons, and making financial concepts relatable, they can help investors make better-informed choices.
Mutual Fund Distributors play a critical role in breaking this herd mentality. Here’s how:
When investors choose mutual funds, they often follow the crowd. This feels convenient and safe, plus it brings social approval. However, this behaviour can lead to unmet goals and poor returns. While it’s understandable, it’s not a good practice financially or behaviourally. Mutual fund distributors play a key role in shifting investor behaviour. They can help move investors from trend-driven choices to goal-focused ones. MFDs can also guide investors from being reactive to being proactive. By building trust, clarifying complex ideas, and offering personalised guidance, they help investors stand out and reach their financial goals.
