Financial experts reveal that behavioural biases such as recency bias, loss aversion and FOMO often lead investors to buy after rallies and sell during market corrections, reducing their actual returns even when they invest in well-performing funds. According to reports from Mint, this creates what behavioural finance experts call the 'behaviour gap' - the difference between a fund's reported returns and the returns investors ultimately realise. Many mutual fund investors spend considerable time selecting the right scheme, yet their own behaviour often has a greater impact on long-term returns than the fund they choose.
Recency bias explains much of the gap between fund returns and investor returns, as explained by Protima Dhawan, Director & Unit Head at Anand Rathi Wealth Limited. She points to the recent gold rally as a classic example, where between March 2024 and March 2026, gold prices rose nearly 117%, yet about 75% of all Gold ETF inflows came only after gold had already gained around 72%. As a result, while gold more than doubled during the period, the average investor earned an absolute return of only around 23.5%. Rhishabh Garg, CEO of FundsIndia, notes that investors chase what has done well recently and exit what hasn't, often leading to buying high and selling low.
Experts highlight that loss aversion is another major behavioural trap, where investors tend to feel the pain of losses more strongly than the satisfaction of gains, leading to emotional decisions during market declines. According to reports from Mint, during the sharp market correction in March 2020 when the Nifty 50 fell 23% in a single month, inflows into small-cap mutual funds dropped by 89%, even though valuations had become significantly more attractive. Many investors redeemed or stopped investing because they feared further losses, yet the Nifty Smallcap 250 Index went on to deliver around 105% returns between March 2020 and December 2021.
Financial experts recommend several strategies to overcome behavioural biases. Protima Dhawan advises sticking to a long-term investment strategy, continuing SIPs during market corrections and avoiding investments based solely on recent performance rankings. Rhishabh Garg suggests automating investments through SIPs, defining financial goals and investment horizons in advance, and avoiding chasing recent top-performing funds. Madhu Lunawat recommends following a '24-hour redemption rule' - writing down why investors want to sell and waiting 24 hours before acting, as well as measuring progress against long-term financial goals instead of daily NAV movements.
