BEFORE YOU ACT: QUESTIONS YOU MUST CONSIDER TO CURB EMOTIONAL INVESTING

Think through regulation, risk, suitability and liquidity before taking informed decisions

- MRIN AGARWAL

Investor behaviour hasn't changed. There was a sense that investors are getting rational and thinking long-term, but a sustained drawdown proved that not much has changed. Despite access to more information and better financial literacy, investors still exhibit the same emotional tendencies: fear, greed, overconfidence, herd behaviour, and loss aversion.

Basic instincts: Emotions often override logic. Otherwise, investors wouldn't be asking about stopping SIPs or switching from equity to gold. These questions usually reflect a need for control during uncertain times. While gold can hedge risk, switching based on short-term fear overlooks equities' long-term growth potential. SIPs help average out market volatility and work best when continued during downturns. Yet investors have shown persistent loss aversion in recent months.

Products are still chosen based on gross returns. But are they the right way to assess a product? Consider low-rated, high-yield corporate bonds, which are drawing growing interest. Many investors assume these offer equity-like returns with lower risk. However, low-rated bonds carry significant default risk, and even if secured, recovering money after a default is difficult. Relying solely on high gross returns can be a costly mistake.