Anchoring bias affects mutual fund choices by making investors stick to the first number or detail they see. This “anchor” could be a past high return, an initial NAV, or a fund’s rank. It makes investors judge future choices based more on that anchor than on current facts or risks, which can lead to poor decisions. For example, if a fund gave a 20% return once, the investor may hope for similar returns even when the market changes.
What Is Anchoring Bias in Mutual Fund Choices?
Anchoring bias is when you rely too much on one initial piece of information. In mutual funds, this could be a fund’s past high return, the NAV at the time you first saw it, or a high rank in some list. These initial impressions often affect your decision more than they should, even when new, important information is available.
How Does Anchoring Affect Mutual Fund Investors?
Investors may rely on past performance, such as “this fund made 30% last year, so it must be great.” This ignores risk, consistency, and the fund manager’s skills. It also ignores market changes and current fundamentals. Similarly, some may fixate on the NAV of a new fund offer (NFO), thinking lower NAV is better—which might not be true.
This bias makes people cling to one data point, affecting both fund selection and wealth goals.
Why Anchoring Bias Is Dangerous
Relying on a fixed anchor can cause you to miss better opportunities or hold on to poor choices. For example, an investor might keep waiting for a fund to reach its past high before selling—even if fundamentals have deteriorated. Studies show that many investors admit anchoring influences them when picking mutual funds :contentReference[oaicite:0]{index=0}. This bias becomes even stronger in fast-moving markets or when media or analysts set high expectations.
How to Avoid Anchoring Bias in Mutual Fund Investing?
- Use a clear checklist: Focus on fund goals, risk, performance consistency, and fund manager quality.
- Compare multiple funds, not just one with a good past return. Look at what worked during market ups and downs.
- Ignore flashy numbers like one-year return or initial NAV of an NFO. Look beyond headline figures.
- Seek advice from trusted advisor or check multiple sources—don’t depend on one strong number or headline.
- Regularly revisit your investments and adjust based on current data, not first impressions.
Being aware of anchoring bias helps you make wiser choices instead of chasing the first number you see :contentReference[oaicite:1]{index=1}.
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