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Below the Quote on From Fear to Confidence – How to overcome Loss Aversion Bias by Mr. Ashok Kanawala, HDFC AMC Ltd

Investing in financial markets can feel like walking a tightrope between risk and rewards. Whether you’re new to the world of investing or a seasoned investor, one emotion often stands between you and your best investment decisions: Fear. Specifically, loss aversion bias – The fear of losing money.

What is Loss Aversion Bias?

I hate losing more than I love winning

Loss aversion is the tendency to avoid loss over maximizing gains.

Let’s consider 2 scenarios:

Which scenario will make you happier?

The payoff from both the above scenarios is the same at Rs 500, but the emotional outcomes are different. In the second scenario, the payoff of Rs 500 is a combination of a gain of Rs 2000 and a loss of Rs 1500, with the loss giving more pain than the gain.

Similar experience is observed in investing; consider the below scenarios:

* Investment with cost price of Rs 1000 is sold at Rs 2000

* Same investment has touched a high of say Rs 3000 and is now trading at say Rs 2000, the pain from notional loss of Rs 1000 will be much more compared to the overall gain on the investment.

Loss aversion bias is also evident from the fact that investors usually prefer Fixed Deposits over instruments with variable returns but with an ability to beat inflation more effectively.

Recently, Indian Markets have seen significant turbulence, with NIFTY 50 Index (TRI) down ~10% from the recent high of September 26, 2024. While it’s natural to feel uneasy during such dips, such corrections are a normal part of market cycles and offer opportunities to invest at better valuations, which could enable long-term wealth creation.

The key is to ignore the noise and stay focused.

Overcoming Loss Aversion with SIPs

A Systematic Investment Plan (SIP) is a convenient and disciplined way to invest in mutual funds, which can help you to overcome Loss Aversion Bias.

* Helps to keep your emotions away while investing

An Illustration:

SIPs act as a shield, keeping emotions away and helping Investors stay consistent regardless of market fluctuations.

* Rupee Cost Averaging

Invest a particular amount in a scheme periodically i.e. daily, weekly, monthly or quarterly irrespective of the ups and downs of the market movement. Rupee cost averaging helps an investor to average out their cost by buying more units when the market is down, and less units when the market is up

* Encourages Long-Term Focus

SIPs align with long term financial goals by promoting a habit of consistent investing. This helps investors look beyond short-term market corrections and focus on the bigger picture.

Overcoming loss aversion bias isn’t about eliminating fear entirely- It’s about managing it. Understanding this bias and using tools like SIPs can help you transition from a fear-driven to a confidence-driven approach. Remember, wealth creation is a marathon, not a sprint. Markets may be volatile today, but history has shown that they reward patience and resilience over time. Stay focused on your long-term objectives, and let your investments work for you.

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