“Behavioural Finance” is one of the most important concepts in the world of investments.
I have noticed in some of the investor’s portfolios where the investment returns and the investor returns are not the same. I often wonder where is the disconnect?? It is the behaviour of the investor that determines the investor experience.
Across the world, especially in developed markets like the USA, the holding period of equity-oriented investment has come down drastically (6 months and below) which means that investor is looking for instant gratification. (thanks to instant apps like SWIGGY, UBER, cryptocurrencies and other digital apps which drive this need).
Investment should be like watching paints dry (or) watching grass grow. It is a long-term story especially if the asset class is growth-oriented (equities)
Any asset class will carry risk in some way or the other. For example, in fixed income securities, you carry reinvestment risk (For example 8% return earning fixed deposit done 3 years ago, will not be renewed for further 8% in the upcoming 3 years as the interest rates are fallen now drastically – here the investor carries the reinvestment risk). Also, added to that is the pre-tax and post-tax returns are different if someone is in the highest tax bracket.
A guaranteed return product for a 20/25 year term will carry the inflation risk as Guaranteed schemes will invest only in safe-haven products like Government Securities and other bond instruments but it will result in a negative return if inflation is factored.
Hence, it is important to tag your investment to Goals so as to have a good investment experience and not to sway away due to market movements.
Mutual funds provide solutions for a week, month, 1 year, 3 years, 5 years, 10 years and so on and there are specific product buckets to suit each investment objective based on a person’s risk profile. Hence, when you are planning to invest instead of making Adhoc investments, consult a financial advisor, identify your short, medium and long term goals and invest according to that and reach your financial destination!!
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