These biases rarely work in the investor’s favour, because more often than not, they tend to allow emotions to dominate the decision-making process, as opposed to facts. 

 

Over the long term, these biases could seriously affect your ability to earn the kind of returns you wish to. Fortunately, mutual funds can help you keep your emotions aside and get over some inherent biases. Let’s take a closer look at some of the investing biases that these assets help you overcome, so you are not a victim to emotional investing. 

 

 

• Confirmation bias

 

Confirmation bias occurs when you only factor in the details and the facts that correlate with your own long-held beliefs. In other words, you tend to overlook the details that contradict what you believe in about the markets. For example, say you tend to believe that the travel and tourism sector always performs well. Confirmation bias encourages you to hold on to this belief even when the sector is underperforming. You tend to conveniently ignore any information that shows the sector in poor light, owing to this bias.

 

This kind of bias can result in poor decision-making, since you will often overlook or ignore certain crucial elements from your trading or investment decisions.

 

How mutual funds help you get over confirmation bias:

Mutual funds have their own predetermined objectives, and the investment strategy is closely aligned with the objective. Furthermore, they are managed by professional fund managers who take into account all the relevant information, even if it does not align with their individual views.

 

 

• Recency bias

 

Recency bias, as its name indicates, makes you look only at recent data and figures before you make an investment decision. Historical data is rarely on your radar if you suffer from recency bias. For instance, let’s say you want to invest in a particular equity class of assets. Recency bias will encourage you to take into consideration only the most recent returns offered by that class of equity assets. 

 

The downside of this kind of bias is that you may ignore very crucial data from six months or one year ago, and focus solely on recent events alone. 

 

How mutual funds help you get over recency bias:

The fund managers in charge of managing mutual fund investments on behalf of investors are trained to take into account various data and information such as market cycles and historical information. They factor in all the relevant past data before making investment decisions for the fund. 

 

 

• Information bias

 

If you like to do things thoroughly, chances are, you may suffer from information bias when it comes to investments. This term refers to the tendency to factor in every little bit of information you come across, even if it does not pertain to your investment decision. For example, say you wish to invest in the healthcare sector. Instead of researching the said sector’s historical data and future prospects alone, if you spend time also getting to know how other related or unrelated sectors have performed, you may be a victim of information bias.

 

The main disadvantage of information bias is that you have too much information available, most of which may be irrelevant to your investment goals.

 

How mutual funds help you get over information bias:

Mutual funds each have their own specific investment objective, as you’ve seen before. Fund managers are experts at choosing the information that is pertinent to the investment objective of the fund. This ensures that your investments don’t suffer from information bias. 

 

 

• Anchoring bias

 

Anchoring bias is an emotional investing bias that forces you to latch on to one particular bit of information. This may be a detail that led to a good investment in the past, or it may be a bit of information that you find easier to track. For instance, say you are investing in equity, and you focus only on the price to earnings ratio to decide on which stocks to invest in. This essentially means that you are anchoring on to the PE ratio in your investment decisions. 

 

As you may have guessed by now, anchoring bias can be harmful because it prevents you from looking at other essential metrics and facts like the 52-week low and high, the market cap, the earnings per share, and other such details. 

 

How mutual funds help you get over anchoring bias:

The decisions about which assets mutual funds invest in are taken after a thorough study of all relevant metrics. So, you need not worry about your anchoring bias affecting your mutual fund investments. 

 

 

• Loss aversion bias

 

Loss aversion bias, as the name indicates, is an inherent aversion to and fear of loss. This fear drives investors away from high-risk assets that may have the potential to deliver significantly higher returns, and instead leads to such investors concentrating their capital in low risk assets that may not really help with wealth creation. For instance, loss aversion bias may prevent you from investing in equity stocks. 

 

How mutual funds help you get over loss aversion bias:

Mutual funds come with varying levels of risk. So, even if you suffer from loss aversion bias, you can choose a stable equity fund that has been proven to deliver good returns over the long term. This, coupled with the assurance that the fund is managed by an expert, can help you overcome this bias. 

 

Wrapping up

These are only some of the many investing biases that mutual funds can help you get over. And the best part is that you can invest in mutual funds even without a lump sum amount in hand. A Systematic Investment Plan (SIP) can help you here. But then, how much should you invest in mutual funds? Is there any right amount? Find out in the next chapter. 

 

A quick recap

• Confirmation bias occurs when you only factor in the details and the facts that correlate with your own long-held beliefs. Mutual funds have their own predetermined objectives, and the investment strategy is closely aligned with the objective, thus eliminating this bias.
• The fund managers in charge of managing mutual fund investments on behalf of investors are trained to take into account various data and information such as market cycles and historical information, thereby eliminating recency bias.
• Fund managers are experts at choosing the information that is pertinent to the investment objective of the fund. This ensures that your investments don’t suffer from information bias. 
• Also, the decisions about which assets mutual funds invest in are taken after a thorough study of all relevant metrics. So, you need not worry about your anchoring bias affecting your mutual fund investments. 
• Mutual funds come with varying levels of risk. So, even if you suffer from loss aversion bias, you can choose a stable equity fund that has been proven to deliver good returns over the long term.