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  • Behavioral Finance

    Published Date : July 14, 2020

    Despite the gloomy scenarios all around, investments in Mutual Funds is still holding strong as in the previous year. As per AMFI, mutual funds invested nearly Rs 39,500 crore in the stock markets in the first six months of 2020, more than four times the amount infused in the corresponding period last year. Looking at the future potential in MF investments, fund organisations are coming up with innovative funds such as behavioural funds, enabled by technology tools, to offer diversity as well as (possibly) superior returns.

    Behavioural funds seek to combine behavioural and cognitive psychological theory with conventional economics and finance. The field has gained significant attention in academia as pricing anomalies have been discovered. If funds can exploit such anomalies, they can generate better returns without taking on excess risk -- the Holy Grail of investing.

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    To analyse the track record of such funds, Journal of Asset Management has examined the performance of 59 behavioural finance funds for the 21-year period (1990-2010) in both U.S. and global markets. They have observed that behavioural funds generally outperform S&P 500 index funds on a non-risk-adjusted basis.

    Mapfre AM is launching one such fund that aims to exploit pricing inefficiencies in European equities caused by the behaviour of market participants.

    It has developed a proprietary methodology for identifying opportunities caused by investors reacting to new information in exaggerated or irrational ways. The fund managers then apply detailed fundamental analysis to determine whether these equities represent attractive long-term investments.

    On the other hand, Advisor Software has developed ‘Behavioural IQ’ which asks clients a series of questions and follow-ups that evaluate bias tendencies and generates a single risk number that's used to make the most appropriate investment recommendations. It provides planners with detailed insight into six different behavioural factors that influence clients' thoughts on risk and decision-making. Similarly, United Capital has developed a technology platform for an adviser which incorporates applications that probe clients' views about money and the deeper reasons behind how they spend and prioritize goals.

    We believe that rising interest in behavioural finance is not surprising considering the fact that higher returns are attainable provided the investor can comprehend the systematic mispricing caused by psychological biases, traits and heuristics.

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