How to control our emotions when investing in mutual funds

Published: January 17, 2021 at 11:17 am

Every time the market hits an all-time high, many investors get jittery. Questions like “should I book profits now?” “Should I stop investing now?” start doing the rounds in social media. This article discusses a simple way to handle our emotions when investing in mutual funds or any capital market-linked product.

The adage, “show me your friends and I will tell you who you are” can easily be modified to suit investors who ask seek counsel on social media: “ask your question, and I will tell you how well planned you are”. Yes, most people who ask questions in personal finance forums like Asan Ideas for Wealth (on Facebook) want to manage money without a plan (and often get angry when we point out the obvious).

Members of this group admitted in a poll (held months before the March 2020 crash) that 1st-time investors would never buy MFs if they knew about risks! So poor understanding about the product and unrealistic expectations are the most common reason investors abandon mutual funds, buy every shiny fund they come across etc. This lot is beyond redemption and is not the subject of this article.

Let us focus on investors’ who appreciate (1) why they need equity in their long-term portfolio; (2) the importance of goal-based investing and asset allocation. Many such investors find it hard to stay focused after investing and worry about doing the right thing.

We shall consider an idea which appears to be an oxymoron at first sight: emotional logic. It is only an idea, and like all ideas hard to implement, however, my hope is at least a few reading this would appreciate its value the next time they think of deviating from their investment plan.

We have already presented the quantitative reasoning behind sticking to a plan: Should I stop my mutual fund SIPs when the market is at an all-time high? However, what appeals to the brain may not appeal to the heart. So let me present an example, my own.

When I started investing in equity mutual funds (June 2008), I had no one in the family with capital market experience, and if I had asked them, they would have cautioned to “go slow” (meaning not too much exposure).

A story many regular freefincal readers would know: for the first five years, my returns were zero (uncertainty after 2008 recovery). I knew my portfolio was “red”, but I kept investing not because I use logic, but because I was emotional. Also see: How fear can make you rich: my money story.

We can never get rid of emotions. We can, however, prioritise these emotions. That is, be more emotional about one thing than another. When I started, I had a big chunk of debt I owed my brother-in-law. Life had taught me the importance of money in a harsh way.

My first “goal” was “never again borrow” (of course, I did borrow again – another hospitalisation, but that was the sentiment anyway!). I saw how my parents’ finances (and mine) were woefully inadequate in handling my late father’s cancer treatment. So I told myself, “I should not be found in the same spot when I get old”.

The emotional requirement to change my life was far more substantial than losses (or gains) that my investments face. Of course, loss or gain worries me as much as anyone else, but each time I fear about profits evaporating, I try to remind myself of emotional requirement #1.

That is what I mean by prioritising emotions or emotional logic. Without equity, an average salaried person can’t achieve financial independence or change their social station. Being emotional about this reality and putting it above all other emotions is crucial for systematic investing and systematic goal-based portfolio management.

In other words, unless we are passionate (= focussed emotion) about changing our life, we will always run to the safety of fixed income at the slightest sign of gain (or loss) and ensure we never change our life.

This is how I control my emotions while investing in equity mutual funds. I do not claim it is foolproof, or that it would for everyone. And it is always easier said than done, but I found the notion of putting one emotion above another quite “logical” 🙂 After all, we have to remind ourselves to be logical but not emotional.

The next time you are worried about your gains evaporating, focus on your goal, asset allocation and maybe remember the discussion in this post. The next time the market crashes, this might help: Worried about the market crash? Use emotions to understand the cost of pulling out

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 640 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2525 investors and advisors are part of our exclusive Facebook Group! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 585 salaried employees, entrepreneurs and financial advisors are part of our exclusive Facebook Group! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps