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As investors, we often obsess over finding the best stocks or mutual fund schemes to invest in. We are attracted to the hot new themes that everyone is talking about. But what we perhaps lack is the discipline or the right temperament to invest.
The legendary investor, Warren Buffett, too has talked about how temperament and not intellect is the most important quality for an investor.
Maulik of Moneycontrol speaks with Pratik Oswal , Head, Passive Funds, Motilal Oswal AMC about where investors go wrong behaviourally and what they must do.
Here are a few important points that Oswal highlighted.
- As a stock market investor, it’s important to avoid biases and manage your emotions both in good and bad times.
- Citing a DALBAR study, Oswal mentions that while the S&P 500 Index has returned 6-8 percent per year over the last 20-30 years, an average mutual fund investor in the US has made only 2-3 percent on average (CAGR). The difference between the two is what is called the behaviour gap.
- Then coming to India, he talks about a Motilal Oswal study that showed that while the index has delivered 12-13 percent over the last 10 years, an average mutual fund investor in India has made only about 7-8 percent return.
- Biases that investors have - In bad times, investors face loss aversion, and in good times, they have the fear of missing out (FOMO), and the tendency to go after trend-based investing (such as investing in small cap funds today which may not be the wisest thing to do).
- Long-term investing – He says invest for the long-term and if you invest in mutual funds, there is no need for frequent reviews. An annual review would be good enough for most investors.
- Don’t resist temptation - If you want to try investing in something risky, don’t resist the temptation but invest a very small portion of your money there. Then, even if something goes wrong, it won’t affect your long-term wealth creation.
- Ways to avoid human biases – One, avoid loss aversion by being a systematic investor. So, invest every month, week or day, whatever works for you. In India, the mutual fund industry has popularized SIPs (systematic investment plan) for this.
- Then, do not go after FOMO type of investments. Don’t invest in something only because you feel you're missing out.
- Keep a bulk of your money in simple products such as flexi cap funds, multi cap funds etc. that you leave untouched for a long time. Don’t go after high-return strategies.
- Importance of compounding – Compounding can be very frustrating as the results are delayed and cumulative but if you start investing early, you will be surprised by how many more times your money will get multiplied.
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