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It's All in the Mind

The fear of not doing what everyone else is doing-coupled with high pressure marketing-appears to have overcome investors' rational thought

People who read Cosmopolitan magazine are very different from those who do not."—Donald Berry, in Statistics: A Bayesian Perspective

Now you will just not have any idea of how apt that statement is unless you've actually read Cosmopolitan (really read it, not just look at the pictures) but I like to believe that fund investors who read Mutual Fund Insight are very different from those who don't. I have believed so far that there are two kinds of fund investors-thinking ones and non-thinking ones. And those who invest their time and money in reading this magazine must be the thinking ones.

What distinguishes the two? The non-thinking ones are the ones who just follow whatever seems to be the flavour of the day. The thinking ones are those who carefully weigh their options, consider the facts and then take rational decisions. However, in recent months I have seen that sometimes, the final step is the same. The non-thinking ones unthinkingly follow the flavour of the day. The thinking ones think carefully, then just ignore the conclusions and follow the flavour of the day. They look at returns, ratings, portfolio statistics and whatnot, but then turn around and invest purely driven by the fear of getting left behind by everyone else. Which, in the current climate, appears to mean investing in a fund IPO.

For the last many months now, many readers of this magazine often write in to confess how, despite knowing that there is no real need to dabble in fund IPOs, they've invested impressive sums of money in new funds. Or even worse, actually switched money from perfectly good long-term holdings into funds that are just being launched.

Non-thinking and non-knowledgeable investors have many reasons for investing in IPOs. These are normally the 'it's available at par' category of reasons that even a mildly knowledgeable investor should just laugh at. But the funny thing is that knowledgeable investors are investing in IPOs not for laughable reasons but for no reason at all.

This basically comes around to what we wrote in our cover story 'Out of Your Mind' in February-March, 2004. I'd like to tell these people, forget about learning more about investing—you probably know enough already. What you don't know is about your own psychology as an investor. The fear of not doing what everyone else is doing-coupled with high pressure marketing-appears to have overcome their rational thought. What is worse is that like all irrationality, this too seems to get drastically magnified by high stock prices.

Are the fund houses to blame? I don't know. It appears to be a chicken and egg situation. Franklin Templeton's IPO of their Flexi-cap fund has fetched them more money than running Bluechip for a decade has. Reliance Mutual Fund has increased the size of its equity AUM by 65.87 per cent through just one fund, reaching Rs 4,082 crore where nearly 10 years had got it to just Rs 2,461 crore. Running a fund house is a business and if investors will invest only in new funds, AMCs will definitely supply them.

All of which appears to be building up to a situation where investors will put in a lot of new money into mutual funds with expectations that are so high that they cannot be met.

The die is, well and truly, cast.