The Psychology Behind Mutual Fund investment

The Psychology Behind Mutual Fund investment

Psychology plays a massive part in mutual fund investment. As investors, we have unique personalities and we have unique responses to the different situations that face us. Therefore, let’s look at the different psychological effects or commonly observed behaviour that investors display when they are confronted with making decisions regarding their investments. Take a look!

Psychological Factors that Affect Mutual Fund Investment

  • Confirmation Bias

Confirmation bias works negatively among investors. For instance, you believe in a particular outcome and you spend time looking for evidence to confirm your outcome, rather than believing those pieces of evidence that do not confirm your preferred outcome. This is known as confirmation bias which tremendously affects your ability to make a rational decision.

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  • Diderot Effect

This effect refers to a phenomenon wherein a person purchases more products related to the current purchase. For example, if a girl buys a dress, she is likely to go on to purchase accessories or shoes. In the same way, once a person buys mutual funds they are likely to purchase more of the same.

  • Loss Aversion Bias

The pain of a loss hurts more than the joy of a gain. That’s why when you lose Rs. 2000 on the market you are more likely to feel worse than you would if you had gained Rs. 10,000. The tendency to feel losses more than gains is known as loss aversion bias. This can cause an investor to panic more than necessary. The best cure? Keep a safety net somewhere in case.

  • Overconfidence Bias

Investors tend to believe in their knowledge and skill more than they should. Even the common investor tends to believe the mutual fund investments they make are the result of superior stock picking rather than luck. There is a tendency among investors to be unhealthily overconfident.

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  • Pareto Principle

The Pareto principle states that 80% of the rewards come from 20% of the efforts. Basically, it means investing 20% of your income in any mutual fund scheme will give you 80% of your financial requirements in future.

  • Zeigarnik Effect

This effect means that a person always remembers those tasks that are not as yet completed. Hence, if they do not have sufficient funds they will worry about their future. That’s why this can inspire them to invest in mutual funds. To invest and prepare for your future get in touch with a mutual fund agent today.

Final Thoughts

In conclusion, mutual fund investment is heavily influenced by psychology. Typically, greed and fear are the two emotions that rule the stock market. These and herd mentality play a major role in formulating and making those decisions that shape the future of the markets.