Facts Vs Biases about Investments

Bias is an illogical or irrational preference or prejudice held by an individual, which may also be subconscious. In the investments, if we make decisions based on bias it becomes more harmful as it directly affects our wealth. Hence in investments, we need to understand the facts so that the right decisions can be taken based on truth rather than our bias/emotions. Here are a few biases and the real facts to understand more about equity investments. 

 1.      Equity is RISKY

Yes, it’s true for short-term investments or trading but when we talk about long-term equity investments the risk comes down substantially. According to few studies if we have invested in Nifty 50 (TRI) through SIPs there is only 0.1% chance of negative returns if the investment period is 5 years and 0% chance of negative returns if our investment period is more than seven years.

So, equity investments should be made for the long term only.

 

2.      All Mutual Funds are Equity Funds

Broadly Mutual funds are categorized into three types: Equity, Debt, and Hybrid funds.

Only Equity funds invest the entire amount in equities whereas debt funds invest only in debt products i.e. Bonds, Debentures, Govt Securities etc. Hybrid Funds have a mix of equity, debt, gold, real estate etc.

One should consult an Expert/Advisor to understand the differences and based on his/her investment horizon and risk appetite a fund should be selected.

 

3.      My Money is more Secured in Bank FD or Cash

Yes, when we keep our money in Fixed Deposit, we get a fixed interest rate which is not the case with equities. But the interest rate that we get could not beat inflation. The truth is that the purchasing power of money goes down. Let’s understand it by an example: if we have invested ₹ 100 in Bank FD for one year at an interest of 7.5% then at the end of the year we will get ₹ 107.50. However, due to inflation, the item which was priced at ₹100 is available at ₹ 110 after one year so we are actually at a loss of ₹ 2.50 (110-107.50).

Equity is the only asset class that beats inflation over the long term.

 

4.      I have invested so much in equity

The fact is that most of us have not invested even 10% of our total Net worth in equities but are worried all the time. To calculate the percentage allocation in equities we should add all our assets i.e. real estate properties, Bank FDs, PPF, EPF, Gold, equity etc to find the total net worth and then calculate the percentage of equities. Most of us have major investments in real estate and investment in equities would be the least but ironically, we are least bothered about real estate values and most worried about equities because the prices of equities are available easily daily whereas for real estate it is not.

Most of us need to increase our allocation to equities to beat inflation and keep our money growing to meet lifestyle expenses.

 

5.      I should track my investments on daily basis

Many people are obsessed with the price movements in the equity market. They feel that by checking the prices daily they can time the market by investing at cheaper prices and booking profits at higher levels regularly. The truth is that it is impossible to time the market, equity is for the long term and if we remain invested for the long term there is a very high probability to make better returns as compared to trading daily.

By daily looking at portfolio value we will not increase the profits but only our blood pressure.

 

6.      Equity is for short-term Intra-day Only

It is not. Trading and short-term investments in equities are riskier and a lot of studies have proved it. Short-term investments should be in debt products i.e. debt mutual funds or maybe short-term FDs whereas investments in equities should be for a longer time.

Beware, Trading looks more exciting but carries much more risk and we should not play with our serious money for these activities.

Finally, Investments are a serious business and we should take proper guidance from an expert who can guide us based on our short-term and long-term goals and on our specific needs and risk appetite.