How Behavioural Tendencies Affect ELSS Fund Investments?

How Behavioural Tendencies Affect ELSS Fund Investments?

22 Aug 2019

Equity markets can remain volatile in the short to medium term, but growth can be seen over longer time periods only. There are many factors which make the markets volatile and affect our investment temperament. But when markets suddenly fall or rise, it increases our anxiety of losing our hard-earned money or losing out on potential opportunities.

Seeing volatility in the market, we tempt to ask this question to ourselves — does my fund’s performance reflect a fundamental change which may be a good enough reason for me to stop my SIP’s or redeem my investments? What if it is a case of negative market sentiment like the current scenario of rupee depreciation, crude oil prices hike, elections etc.?

Cognitive and emotional decisions are the two kinds of decisions that human beings take.

Markets are bullish - Time to stop SIPs?

Markets are bearish - Time to stop SIPs?

Markets are not going anywhere - Time to stop SIPs?

On a broader level, emotional decisions are influenced by the heart and may be irrational while cognitive decisions are rational decisions that are taken by the brain.

Some decisions should have as little emotional influence (such as Investments) as possible while some decisions have to be shaped by emotions. Investment related decisions cannot be influenced by emotions and these would require deep understanding as well as logic.

Equity Linked Saving Schemes (ELSS) are tax saving mutual funds that earn you a tax break of upto Rs. 1.5 lakhs under Section 80 C of the Income Tax Act. ELSS is riskier than the fixed income alternatives available for tax-saving under section 80C, but has the shortest lock-in period and offers the potential of growth via equity. Young earners who are starting to save for retirement can look at ELSS to achieve this as well as save on tax. You could invest a lump sum in ELSS each year, but if the SIP route is used, then remember that each SIP installment in ELSS over the years will have a lock-in period of 36 months (or three years). Once the lock-in ends, the investments in ELSS may be continued as an open-ended scheme.

ELSS is considered to be one of the finest tax saving investment options and comes with a lock-in period of three years. It can be quite tough to stomach the volatility of the funds you have invested in. During volatile times, SIP’s seem to stop and redemptions go up, both quite prematurely. Behavioural experts state that investors feel losses more than higher returns. In order to prevent further losses, they tend to stop their SIP’s or redeem the invested amount when the markets show a bear phase. BUT remember - volatility is your friend if you are a long time investor. You will have to invest systematically in ELSS funds and not let emotions override your cognitive decision making abilities.

Your ELSS investments can be affected with the following common behavioral tendencies, which you need to safeguard against:-

  • A. Overconfidence may kill your investment: Overconfidence appears to be a major issue when it comes to making investment mistakes. Many investors become overconfident and they ignore the basics. This leads to a bad investment decision and affects ELSS investments. Systematic Investment Plan (SIP) helps you to invest in ELSS funds. SIP’s allow you average out your cost of acquisition (COA). Those with high risk tolerance and longer financial horizons, or have many years until they need to reach their financial goals, such as retirement, were more likely to buy high as well.
  • B. Don't try to time the market- One thing that even Warren Buffett doesn't do is to try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares. A majority of investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus end up losing their hard-earned money in the process. Investing into ELSS can be done as time investment or in SIP mode. People wait for dips to buy, and then end up investing at the wrong prices levels. So, you should never try to time the market. In fact, nobody has ever done this successfully and consistently over multiple business or stock market cycles. Catching the tops and bottoms is a myth.
  • C. Keep Stress away from investing: The high level of stress in financial markets threatens retirement accounts and portfolios; it also depletes an investor's greatest resource: brain power. ELSS fund investors should not be carried away by the daily movements of the market and you should continue your SIP’s for avoiding the stress which can potentially affect your ELSS investments. An asset class or an instrument is not a person who is likely to disappoint you repeatedly. It follows market cycles and financial principles, and its past performance is unlikely to have a bearing on its future outcome. So trust the experts, not your brain, and go back to the instrument if it is good for your finances.
  • D. Avoid Herd Mentality: The fear of missing out on a profitable investment idea is often the driving force behind herd instinct. Following the actions of people without analyzing the good or bad is defined as ‘Herd Mentality’. This happens particularly when it comes to equity-oriented investments. The world's greatest investor Warren Buffett was surely not wrong when he said, "Be fearful when others are greedy, and be greedy when others are fearful!" Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. However, this strategy is bound to backfire in the long run. An ELSS fund is selected on the basis of investment goals and risk profile of an investor. You should pick a fund that matches your needs and you should not select a fund that is popular because everyone is investing in it.
  • E. Keep reviewing the performance: Any important event happening in any part of the world has an impact on our financial markets. Hence, we need to constantly monitor our portfolio and keep affecting the desired changes in it. Keep reviewing the performance of schemes after the lock-in ends. If you can't review your portfolio due to time constraints or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing that. If you can't even do that, then stock investing is not for you. Better put your money in safe or less-risky instruments.

If the ELSS scheme is performing, there's no harm in staying invested in it for the next year. While looking at a fund's performance, do not get led by the fund's return in isolation. Compare the scheme's returns as against the benchmark returns. A scheme which cannot beat its benchmark on a consistent basis need not be in your portfolio. Also, taking a look at the category average returns will tell you how good or bad your investments really are.

Avoiding behavioural tendencies, such as those elaborated above, can save you from a lot of trouble and disappointment, especially when it comes to investing in ELSS Funds.

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