Investors frequently undermine their long-term wealth creation by making behavioral mistakes, such as chasing recent market winners, according to prominent mutual fund industry veterans. During a panel discussion at Groww’s India Investor Festival, Nilesh Shah, Navneet Munot, and Kalpen Parekh highlighted how recency bias, emotional investing, and unrealistic return expectations significantly damage portfolio returns.
The Pitfall of Recency Bias
Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, emphasized that investors are often drawn to assets only after their prices have surged. “One of the biggest mistakes investors make is recency bias,” Shah stated. He explained that this bias leads investors to assume past high returns will continue indefinitely, often prompting them to buy near market peaks.
Shah illustrated this with the example of silver prices, noting a dramatic increase in investor interest after significant rallies. He pointed out that interest was low when silver was at $18 per troy ounce, but surged when it reached $120, indicating a tendency to buy high. Similar patterns are observed in thematic and sectoral funds, where investors enter after strong past performance without fully understanding the long-term structural thesis, leading to unrealistic return expectations.
The Power of Patient Investing
Navneet Munot, Managing Director and CEO of HDFC Asset Management Company, stressed the importance of patience, equating SIP (Systematic Investment Plan) with “Stay Invested Patiently.” He cautioned against emotional reactions to market volatility, which often reduce investor returns. Many investors pause their SIPs during market corrections, only to restart after recoveries, missing out on opportunities to buy units at lower valuations.
Munot also advised investors to ignore social media noise, geopolitical headlines, and short-term market events that might trigger impulsive decisions. Despite short-term fluctuations, he remains optimistic about India’s long-term growth story, citing its democracy, demographics, demand, digitalization, and determination.
Setting Realistic Expectations
Kalpen Parekh, Managing Director and CEO of DSP Mutual Fund, identified unrealistic return expectations as a major issue for retail investors. “Please have realistic expectations,” Parekh urged, warning against anticipating compounded returns of 30% for extended periods. He noted that investors often focus solely on short-term bull market gains, overlooking historical long-term averages.
Parekh clarified that over very long periods, average real returns above inflation typically range between 0% and 6%. He underscored the necessity of maintaining discipline throughout all market cycles, reminding investors that discipline is as crucial during periods of market euphoria as it is during downturns.
Collectively, the panel advised investors to prioritize patience, strategic asset allocation, and disciplined investing over the impulsive pursuit of recent winners or emotional responses to short-term market movements.