Behavioural biases cut mutual fund investors' real returns
Get the Finance newsletter
Daily finance — markets, central banks, M&A, the prints that move money. Free.
- Gold ETFs illustrate the gap sharply: gold rose ~117% between March 2024 and March 2026, but roughly 75% of inflows came after gold had already gained ~72%, leaving average investors with only ~23.5% absolute returns despite the asset more than doubling.
- March 2020 small-cap panic showed the same pattern: when the Nifty 50 fell 23% in a single month, small-cap mutual fund inflows collapsed by 89%, yet the Nifty Smallcap 250 Index delivered ~105% returns between March 2020 and December 2021.
- Protima Dhawan of Anand Rathi Wealth Limited attributed the gap primarily to recency bias, while Rhishabh Garg of FundsIndia added herd mentality, fear of missing out (FOMO) and overconfidence as drivers of frequent fund-switching and market-timing attempts.
- Madhu Lunawat of The Wealth Company framed the problem as evolutionary: "Our brain was never wired to make us rich. It is wired to keep us safe," noting that loss aversion makes investors abandon 20-year plans in 20 minutes during corrections.
- Drawdown data underscores that corrections are routine: the Nifty 50 has seen an average peak-to-trough drawdown of ~18% every year since 2001, according to Dhawan.
- Lunawat's "24-hour redemption rule" requires investors to write down the reason for any planned sale and wait 24 hours before acting—she says if the reason still holds the next day, it was rational; if it was fear, the investor has saved themselves from an expensive mistake.
- Garg's prescriptions include automating investments through SIPs, defining financial goals and horizons in advance, reviewing portfolios periodically rather than daily, and rebalancing on a fixed schedule.
- Dhawan recommended continuing SIPs during corrections and avoiding investments driven solely by recent performance rankings, arguing that disciplined processes—not reactions to short-term moves—are the most effective way to close the behaviour gap.
Why it matters: For India's growing mutual fund base, the behaviour gap is a real and measurable cost: gold investors captured barely one-fifth of the asset's 117% rally, and small-cap investors who fled the March 2020 crash missed a 105% rebound. The practical takeaway—automated SIPs, periodic reviews, a 24-hour cooling-off rule—targets the moment of emotional decision-making that most directly erodes long-term wealth.
Ask SkimNews
