Listen to this article
Loss aversion is one of the major biases among investors. It explains people's tendency to prefer avoiding losses to acquiring equivalent gains: it is better not to lose Rs. 5,000 than to gain Rs. 5,000. Such behavior often leads people to stay away from profitable opportunities, due to the perception of high risks, even when the risk could be very low. It is important for an MFD to understand this bias among their clients and guide them to help them leverage the potential of the mutual fund market.
Cafemutual talked to some leading MFDs on their strategies to help their clients overcome this bias. Here’s what they had to say:
Pune MFD Nitin Bellara of Zeus Distribution House believes that it is important to gradually build the portfolio of loss averse investors. He said, “If an investor is loss averse, we try to not give them equity at first. We allocate arbitrage or liquid funds to such investors. We also recommend STPs and other methods of gradual deployment of funds. It is only when we are reasonably sure that a riskier investment can give better returns when we stick our neck out and recommend them to such investors. We also inform investors about cycles in small and mid-cap investments and data for past returns. With time, the investors also become more confident after seeing the ups and downs in the market.”
Delhi MFD Retd. Col. Sanjeev Govila of Hum Fauji Initiatives also believes that it is necessary to take time with loss averse investors. He said, “The first thing we do is to show such loss averse investors a chart that shows how the chances of losing money decreases with long-term investment. We also instill in their minds that as you move away from risk, you also move away from the possibility of getting high returns. As far as portfolio goes, we take such investor towards liquid funds and debt funds. We try to make them aware that investment in mutual funds does not imply investing in stock markets. Once they become comfortable with their low-risk investments, we take them towards equity. Good market performance like in recent times also motivates them. It is important for MFDs to recognize that it takes time to break such biases and myths in the minds of investors.”
Mumbai RIA Suresh Sadagopan from Ladder7 Wealth Planners believes that it is necessary for MFDs to give such loss averse clients the big picture. He said, “There are investors who get too fixated on not making loss and refuse to leave an investment while in loss. We try to reason with them and remind them that their investment is just a vehicle to fulfil their financial goals. In order to increase the risk appetite of such investors, we ask them to give us a small portion of their portfolio for a certain time. This becomes a way for us to build the trust of the investor. Once the investor sees good returns on this small portion of his portfolio, he will start investing in riskier investments.”
Chennai MFD Chokkalingam Palaniappan of Prakala Wealth believes that the only way for loss averse investors to come out of their biases is through education. He said, “We show them how they will have to invest more and for more time if they choose a less risky investment. We also make such investors aware that even investments like provident fund and insurance that are considered safe, eventually invest in the stock markets. So, after educating them, we convince them to invest a portion of their investment in equity based on their age profile. We also encourage investors to go through the SIP route so that they buy units based on the current NAV. We educate them on the organizational stability of blue-chip companies and how they cannot go down with a small crash in the market. After a few years, most of such investors feel comfortable investing in riskier investments.”
