Overconfidence in stock markets exists in two forms: overconfidence in the decision investors make and over confidence in the information investors receive. In the former, investors often take risky bets and focus on one stock or a trend way more than they should. In the latter, the investor blindly believes information they receive regarding any investment scheme, which seems quite attractive. To overcome this bias, have an objective approach towards your investments rather than an emotional one. Rely more on data than hearsay.
it’s the inability to let go of a bad investment even though it has the potential to bring your portfolio down. To avoid this bias, you may begin with setting certain rules and instructions for yourself that enable you to evaluate an investment fairly. For example: You can set a limit price for selling and know that beyond a certain level, you will certainly sell your investment.
When investors unconsciously build arguments or seek information that supports their preconceived notions about an investment opportunity, they are said to be under confirmation bias. Here’s you tackle this bias: While gathering information about a particular sector or stock and shortlisting a company, make sure you have all the facts in front of you. This means assessing the investment option objectively with both pros and cons
Chasing past returns is one thing that will always view investments from the lens of the past. However, past performance is not reflective of future performance. Yet, investors fail to implement this in their investments. In fact, most seasoned investors bet on their investment decisions, which are based on past performance. There is so much volatility and uncertainty that even if you happen to find out the trend by any chance, the markets are unarguably unpredictable.
The risk related to the value of assets shrinking due to the shrinking of the currency value is known as inflation risk. It is majorly used in analyzing the debt funds and its viability, and also helps in assessing the attractiveness of a fund. Ideally, an investment should grow more than the inflation rate to enable an investor to capital.
Benchmark is the platform or the parameter, which is considered as base. A benchmark sets the minimum expectation of returns for an investor and fund manager. A fund is then compared concerning this benchmark and positioned accordingly based on the outperformance. For example: Mirae Asset India Equity Fund is a large-cap fund that primarily invests in large-cap companies. The benchmark is Nifty 100 TRI. Thus, the fund is compared with this benchmark while assessing its suitability for an investor.
If two mutual funds from the same categoryare compared, and one has consistently given higher returns, you should invest in it without paying much attention to the expense ratio. With the lowest lock-in period of 3 years, ELSS let you save tax under section 80C. They have also offered some of the highest returns amongst all tax savings options. Savings bank accounts are giving interest of around 3.5%. Alternatively, liquid funds can be considered as they are giving interest of about 6%these days and are extremely low-risk.
Keeping a track of how much you spend on a weekly or even a daily basis ensures that you don’t end up biting more than you can chew and keeps you away from being in debt. There are many apps today to help you track your expenditures easily Next, it’s time to figure out how much you can afford to spend without going into debt. In your budget, include your necessities (food and commute) and luxuries (eating out or watching a movie). Save the rest without deviating from the budget Develop a financial discipline and keep aside the amount you’ve decided to save in your budget right when your salary comes in. After that, you can choose to invest some amount upfront and then, use the rest for your expenses. This will gradually help you in differentiating between what you need and what you want.