Emotions in mutual funds

Emotions in mutual funds

Emotions plays an important role in every facet of our life. It also does in our investment decision. What we have seen is that entry in mutual fund or equity for that matter is very easy. The day you decide to buy a fund, you take entry. But the more important question is when you exit the fund or how to decide when to exit the fund?

Human is a greedy creature. That is very basic characteristics of all of us. When market is rising we seem to buy more equity, more our existing portfolio is doing good.  And when market is not doing good, we focus on selling everything. One of the perfect example for this is what actually happened with me. One of the investor came to me in 2016 starting. At that time I forcefully asked him to allocate atleast 50% to equity. But he insisted to allocate maximum 20% to equity. I persuaded him and just because we were connected from like last 10 years he agreed to me. It took me 1 hour to convince him for the same. He has always been a debt investor and never liked risk at all. But to my surprise when we were discussing and planning his further investment in May 2017, he wanted to go for 80% equity. But this time I was persuading him for 20-30% equity. What a reverse coincidence. Again I convinced him with my study and reasons for my allocation. But it took me 2 hours to do so. Such a drastic change, complete debt portfolio he became a complete equity player. Do you think his risk taking capacity or willingness has increased? Absolutely not. It is just that because of his returns he is feeling this is what always happens in equity. This is what happens when market do good. Investor feels it will do good forever. But it is not the case.

This is where the role of your financial advisors comes in. Pointers to be kept in mind while investing –

1.     Decide your risk profile – risk profiling is very important. Until and unless you and your advisor is clear about it, correct investment decision cant be taken.

2.     Choice of advisor – it is very critical. There is a complete blog of mine, focusing on this point, read that for reference.

3.     Maintaining discipline – maintaining discipline is very critical. Once you have decided your risk profile, follow it. Don’t just keep changing your decision based upon your decision and portfolio. Markets will go up and down, but only the investor who have discipline in his decision will earn.

4.     Don’t be guided by short term results- in short term trading will be attracting you. You will have your friends who made 1 lakh the other day. Don’t be guided by it. This is what I am saying with 25 years of experience that for earning money in trading on long term basis is very difficult. There are very few who can do it. So focus on long term target and do investing instead of trading.

5.     You don’t have time for investing –  this is the answer which I get from most of the doctors or IITians, and at times even from businessman. They feel that they cant even spare 30 min for investment. What I feel is, they require investing the most because they don’t have time.

6.     Exit from funds- don’t get emotionally attached to any investment or funds. Make decision based on logics and analysis. Make sure your advisor is good enough. You need to exit funds but not very frequently also. Atleast you should have average holding period of 3 years.

Investing is a beautiful experience and soon becomes an important part of your life. It is like your helping hand which is there for you for your retirement, child education, health and each and every part of your life. Enjoy it and happy investing! 

Regards:-

PANKAJ LADHA & CA ANANT LADHA