Anchoring bias is the common human tendency to rely too much on a piece of information when making decisions.
For instance, if a client sees the NAV of his fund move from Rs.10 to Rs.15 in one year, he would expect that the fund would deliver similar returns in future. Based on this experience or reference point, he would like to put more money in the fund.
We spoke to a few advisors to understand how they deal with clients falling prey to anchoring bias.
Babu Krishnamoorthy, President, IFA Galaxy, Chennai
A few years back, one of my clients who made good money through credit funds approached me to invest in these funds. He had seen such funds delivering 15% CAGR in the past.
The only reason for his investment was the expectation of getting CAGR of 15% from credit funds. After the series of credit events starting with the IL&FS crisis, I believe it is not advisable to recommend these funds to risk averse investors in the current scenario.
Since he was suffering from anchoring bias, I believe the best way to overcome this bias is by helping him identify points that are more rational. I explained to him the concept of credit funds, IL&FS fiasco and other credit events. In addition, I made him realize that he should look at multiple factors before making investment decision.
I also highlighted how these funds perform across interest rate cycles, both increasing or declining and the importance of investing in debt funds having exposure to high rated papers in the current scenario.
Mumbai IFA Ranjan Panigrahi
One of my clients had seen his investments grow 4 times in five years in a sectoral fund. In fact, the client had bought a car from his investments.
He approached me after seeing correction in the sector in which he had invested. He was of the view that the recent correction provides a good entry point for him and he would make even more returns in another five years.
I helped him understand that performance of sectoral funds depends on market cycles. For instance, sectoral funds focusing on pharma and IT deliver attractive performance when value of rupee depreciates and vice versa. I also highlighted the risk associated with these funds despite having long-term horizon by citing the example of infrastructure funds.
