Investing in mutual funds? Experts explain the behavioural biases that can quietly reduce your long-term returns
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- Protima Dhawan, Director & Unit Head at Anand Rathi Wealth, identifies recency bias as the main driver of the "behaviour gap"; between March 2024 and March 2026, gold prices rose nearly 117%, but about 75% of Gold ETF inflows came only after gold had already gained around 72%, leaving the average investor with an absolute return of only ~23.5%.
- Rhishabh Garg, CEO of FundsIndia, adds that herd mentality, fear of missing out (FOMO) and overconfidence compound the problem, encouraging investors to switch funds frequently or attempt to time the market, leading to "buying high and selling low."
- Lunawat of The Wealth Company frames the issue as evolutionary: "Our brain was never wired to make us rich. It is wired to keep us safe," which is why investors sell in corrections and buy after rallies.
- During the March 2020 crash, when the Nifty 50 fell 23% in a single month, inflows into small-cap mutual funds dropped 89%, even though valuations had become more attractive; the Nifty Smallcap 250 Index went on to deliver ~105% returns between March 2020 and December 2021.
- Since 2001, the Nifty 50 has recorded an average peak-to-trough drawdown of around 18% every year, making corrections a normal feature of investing rather than a signal to exit.
- Lunawat recommends a "24-hour redemption rule" — investors must write down why they want to sell and wait 24 hours before acting — and also advises writing down the reason for each investment before buying.
- Garg advises automating investments via SIPs, defining financial goals in advance, reviewing portfolios periodically rather than daily, and rebalancing on a fixed schedule rather than chasing recent top-performing funds.
Why it matters: The quantified gold example — investors captured only ~23.5% of a 117% rally because 75% of inflows came after a 72% rise — turns the "behaviour gap" from theory into a measurable loss. For Indian mutual fund investors, the data illustrates that emotional timing can cost far more than picking the wrong fund, making discipline as material as scheme selection.
