Jul 11, 2016 3 min read

Three psychological factors of mutual fund

Psychology is the one big factor which affects all our decisions. There are different aspects which influence even the investing strategies of the clients. Here are a few such factors.

Human psychology is a vast subject which encompasses all the behavioral and mental changes in the walks of life. Every person has a unique personality, and each of them behaves differently in the same situation. But, still there are some factors which remain the same for every individual. These characteristics define the fundamental nature of each and every human being and their ability to act in a particular situation. For example, if any person falls and gets hurt, then his/her obvious reaction would be of pain. There are many such examples where we can see people behaving in a similar manner. Thus, in spite of having diverse characteristics we share some common emotions.

Investing and human psychology go hand in hand, as each and every decision of a person is affected by his/her overall personality. Here are the three essential traits of human beings which will affect their investing decision to a great extent. The following are the features which prominently affects the investing decision for the clients.

Diderot effect:

It is an event in which a person has the urge to buy more products related to the current purchase. For example, if a girl tends to purchase a dress, then immediately she would feel the desire to buy the matching accessories, shoes, and other things. A chain effect is being produced whenever a person acquires anything new. It leads to unnecessary spending and makes us extravagant. But, if we invest that amount in mutual funds then it is possible to earn a good corpus for satisfying the bigger needs of life. You might be thinking how it is possible? It is simple because we generally shop when we get bored of the old stuff even if they do not wear out, which is an impractical task. We just have to find out a better way to maintain and reuse them according to the current trend. Then we will be able to save money for our better future.

Zeigarnik effect:

This effect illustrates the ability of a person to remember those tasks which are incomplete or have been interrupted because of any reason. An experiment showed that a waiter remembered the outstanding orders as compared to the paid ones more quickly. This implies that the things which remain incomplete draw our attention more, and they keep revolving in our mind until they get completed. So, if a client has not planned for his/her financial life, then it is evident to get scary nightmares which will disturb you and your loved ones as well. But, it is better to get relieved of this tautness rather getting sleepless nights and making your near and dear ones take the same pain along with you. However, if you put your money in mutual funds and plan your income in a way which would relieve you of your worries and let you enjoy life fully, then there will be no critical financial issues.

Pareto Principle:

It is also known as the principle of vital few. It means that in everything the ratio of the influenced and the influential is 80:20. It implies that the 80% of the effects comes from the 20% causes. This rule also applies to the business, which tells that the 80% of the profit of a firm is generated by 20% of its clients. Similarly, this rule finds its relevance in mutual fund investing as well. If a client invests 20% of his income in any of the mutual fund schemes, then he will be able to accumulate 80% of the amount which he would require in future. It implies that by sacrificing a small amount now, it is possible to gain a good corpus for fulfilling the future needs when the ability to work reduces.

Thus, by following the three simple and basic traits of the human nature one can excel the growth of their money invested in any of the various schemes of mutual fund. The clients have to be very vigilant and should choose wisely for obtaining maximum returns.