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.
Financial experts say psychological biases frequently prompt investors to buy after markets have already rallied and sell during corrections, reducing the returns they actually earn even when they invest in well-performing funds. This creates what behavioural finance experts call the “behaviour gap”, the difference between a fund’s reported returns and the returns investors ultimately realise.
Recency bias is the biggest wealth destroyer
According to Protima Dhawan, Director & Unit Head at Anand Rathi Wealth Limited, recency bias explains much of the gap between fund returns and investor returns.
“Investors tend to chase whatever has performed well recently, entering only after a large part of the rally has already played out, assuming the same pace of growth will continue,” she said.
She points to the recent rally in gold as a classic example. Between March 2024 and March 2026, gold prices rose nearly 117%. However, 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, said recency bias is one of several behavioural mistakes that hurt long-term returns.
“Investors chase what has done well recently and exit what hasn’t, often leading to buying high and selling low,” he said. According to Garg, herd mentality, fear of missing out (FOMO) and overconfidence further hurt returns because they encourage investors to switch funds frequently or attempt to time the market.
Madhu Lunawat, Founder, Managing Director and CEO of The Wealth Company, believes the problem stems from basic human psychology.
“Our brain was never wired to make us rich. It is wired to keep us safe. That is why we sell when markets fall and buy when markets are already up,” she said.
She added that investors often assume last year’s winning asset or fund will continue to outperform, causing them to invest after the rally and exit after the correction.
Fear often drives investors to sell at the wrong time
Experts say loss aversion is another major behavioural trap. Investors tend to feel the pain of losses more strongly than the satisfaction of gains, leading them to make emotional decisions during market declines.
Dhawan cites the sharp market correction in March 2020 as an example. 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. However, the Nifty Smallcap 250 Index went on to deliver around 105% returns between March 2020 and December 2021.
Lunawat said investors often abandon long-term financial plans because short-term declines feel like immediate threats.
“A twenty-year plan turns into a decision made in twenty minutes,” she said.
How investors can overcome behavioural biases
Experts say the most effective way to reduce behavioural mistakes is to follow a disciplined investment process instead of reacting to short-term market movements.
Dhawan recommends sticking to a long-term investment strategy, continuing SIPs during market corrections and avoiding investments based solely on recent performance rankings.
She noted that since 2001, the Nifty 50 has witnessed an average peak-to-trough drawdown of around 18% every year. Market corrections are therefore a normal part of investing, not a signal to exit.
Garg advises investors to automate investments through SIPs, define financial goals and investment horizons in advance, review portfolios periodically instead of tracking them daily, rebalance on a fixed schedule and avoid chasing recent top-performing funds.
Lunawat suggests following a “24-hour redemption rule”. Before redeeming a mutual fund, investors should write down why they want to sell and wait for 24 hours before acting.
“If the reason still makes sense the next day, go ahead. If it was just fear after a market correction, you have probably saved yourself from a very expensive mistake,” she said.
She also recommends writing down the reason for making an investment before investing and referring to that note before redeeming. Measuring progress against long-term financial goals instead of daily NAV movements can also help investors avoid emotional decisions.
“The investors who create the most wealth are often those who let their emotions interfere the least,” Lunawat said.