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​7 common investing biases you may want to steer clear of​

The factors that make each investor and his/her mutual fund investing journey unique are their financial goals, risk appetites and also their biases towards investments. Your past experiences, conditioning, personalities and even family backgrounds can lead to some biases and hence, have an effect on the decisions you make around money. You may not be aware of it, but these biases often play a substantial role in the kind of investments you may or may not make. These biases can be based on non-existent or imaginary thumb rules that may or may not be valid for the current investing scenarios, and that may obstruct logical thinking.

Here are 7 such biases, that you can try to avoid-

1. Anchoring Bias

It is a bias in which, a past reference/benchmark holds a little too much value weightage in your decision making today. For example, assume that if a mutual fund scheme performed exceptionally well in a particular year due to some external market factors, sticking to that scheme for a long period hence even though it has not been performing up to the mark for a considerable number of years might be a result of anchoring bias. You are, in the end, basing your decision to that one-time benchmark and hoping for it to repeat without any logical reasoning behind it.

2. Bandwagon Bias/Herd Mentality

If you are thinking of buying gold jewellery on an auspicious occasion because everyone is buying it; then you might have the bandwagon bias . Similarly, if you invest in schemes because other investors are doing it, this bias may not be ideal for you. Each investor, their investing journeys, risk appetites and goals are different, and thus, a fund that suits one portfolio may not suit another. Basing your decisions on logic or data is more advisable.

3. Choice Supportive Bias

Do you often tend to defend your choice of gadgets, a sports player, ideologies, a flavour of ice cream or a mutual fund scheme you have invested in? Chances are, you have the choice supportive bias, which implies that you shall be biased in favour of the investment decisions you have made and it is difficult for you to look beyond your choices even if they may not have the best ones in hindsight.

4. Confirmation Bias

Confirmation bias is an inclination to sought out and consume content/information that supports our beliefs and ignore the information that contradicts your beliefs. For example, if you believe that investing in equity schemes is not worth the risk, then you may tend to focus only on the relatively higher-risk part and ignore any information about it providing you with a relatively higher reward too possible if invested wisely.

5. Outcome Bias

Outcome bias is the tendency to judge a decision by its outcome rather than what led to the decision. This bias tends to give less importance to all the events preceding the decision that led to the nature of the decision. For example, assume that if listening to your gut, you invested in a mutual fund scheme that in the end did well and helped you create wealth; this does not mean that all decisions made based on your gut will help you succeed. It might have been pure luck. But outcome bias may force you to disregard this fact. It will keep you from basing your decisions on data and facts next time.

6. Loss Aversion Bias

As the name suggests, loss aversion bias is the fear of loss. Psychologically speaking, the sadness you feel at the loss of, say, Rs 10 is more closely-felt than the happiness you feel at the gain of, say, Rs 20. It is often said that risk-aversion and loss-aversion are confused by the investors. Perhaps, it is time to re-evaluate your risk strategy by eliminating loss aversion bias.

7. Trend Chasing Bias

As an investor, it may be very tempting to invest in schemes or categories of funds that are being much spoken about, or in the news for all the good reasons. Trend chasing bias may lure you into buying schemes that may be good at a point in time but may not deserve a place in your portfolio because they are not aligned with your goals, investment horizon or risk appetite.

The biases mentioned above may affect your investment planning subconsciously, and it is advisable that you either consult your mutual fund advisor before making any investment decisions. Or, you can choose to reflect on your past investment decisions to learn if any of those were influenced by these biases; to make sure that you tread a different, unbiased path hereon.


Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit www.nipponindiamf.com/InvestorEducation/what-to-know-when-investing.htm This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.



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