Recency bias in mutual fund investing means giving more importance to recent performance rather than long-term results. Many investors put money into funds that performed well in the last few months, thinking they will continue to do well. But this can lead to poor decisions, as short-term success does not always reflect the fund’s true potential.

What is Recency Bias in Mutual Fund Investing?

Recency bias is when investors focus only on recent fund performance and ignore long-term data. For example, if a mutual fund gave high returns in the last 3 months, investors may believe it will continue to perform the same way. This belief can be misleading and risky.

How Does Recency Bias Affect Investment Decisions?

Recency bias can lead investors to switch funds too quickly or invest in high-performing funds without checking consistency. This behavior can result in losses if the recent good performance was just temporary. Instead of sticking to a planned strategy, investors react emotionally to short-term gains or losses.

Why is Recency Bias Common Among Indian Investors?

In India, many investors are new to mutual funds and tend to follow recent trends. They rely on advertisements, news, or friends who talk about recent winners. Due to lack of long-term knowledge, they assume that short-term success means long-term potential, which leads to recency bias-driven decisions.

What Are the Risks of Recency Bias?

The main risk is investing in funds that may not sustain their recent performance. It can also lead to higher churn—buying and selling funds too often—which increases costs and reduces returns. Recency bias makes investors ignore important factors like fund manager history, sector allocation, or long-term growth.

How Can You Avoid Recency Bias?

To avoid recency bias, always check long-term performance (3 to 5 years), consistency, and the fund’s strategy. Don’t make decisions based only on recent returns or rankings. Have clear goals, review your portfolio regularly, and trust data more than hype. A disciplined approach helps you stay on track.

Does Recency Bias Impact SIP Investments?

Yes, recency bias can affect SIP investors too. If a fund underperforms recently, some people stop their SIPs without considering the long-term view. This breaks the benefit of rupee cost averaging and long-term compounding. It’s important to stay invested in good funds, even if they don’t perform well temporarily.