All investors are entitled to their choice of investment options and may select the ones they feel are best suited for their financial needs. However, their choices should be governed by research, logic, and a financial plan rather than a particular line of thought that may not serve the purpose of making a suitable choice.
For example, when it comes to investments such as a ULIP plan, that is, a Unit-Linked Insurance Plan, a ULIP calculator can be a useful tool for calculating the ULIP returns and choosing a plan that matches your investment needs rather than making an investment choice based on just word-of-mouth advice, loose facts and uncalculated risks.
However, a lot of investors fall prey to ideas or thoughts that are deeply rooted in their minds and are known as biases. As is the case with everything else, individuals also have specific ideas or biases that influence their investment decisions and, therefore, may cause them to stray from making wise financial choices.
Here are 10 biases that an investor should avoid while making investment decisions:
● Bandwagon Bias
The term ‘Bandwagon Bias’ has been derived from the phrase “jump on the bandwagon”, which means taking a course of action because most people do so. When it comes to investments, this bias can become problematic since different investors have different investment needs and financial capacities.
● Information Bias
Most investors tend to absorb and consider every bit of information that they come across as far as their investments are concerned. However, it should be noted that consuming and using only relevant information about your investments can serve your purpose, whereas excess information can lead to confusion and cause you to miss out on what is important.
● Recency Bias
The latest news and trending information are of great value to every investor. However, to think that the most recent updates or news are always more valuable than the old ones is a fallacy. On the contrary, while choosing investments like the ULIP plans, it is always important to research the past performance of the investment funds underlying specific plans.
● Hindsight Bias
When an investor has a hindsight bias, it means they view past predictable outcomes as favourable and the unpredictable ones as unfavourable. The hindsight bias stops investors from anticipating negative outcomes and allows them to expect only positive results on their investments. However, when the results are not in line with their expectations, they perceive the outcome as unpredictable, whereas in reality, they fail to anticipate the possibility of a loss.
● Familiarity Bias
This bias can be bad for an investor since it restricts their choices to only the investments, they are familiar with and prevents them from exploring other investment avenues. As ULIPs are quite diverse and need to be explored and researched well, a familiarity bias can stop you from opting for the best investments you can make. This bias is why many investors choose only risk-averse investments and shy away from ULIPs, even when their portfolio is structured for an increased risk.
● Confirmation Bias
This type of bias causes an investor to follow the concepts and information that reconfirm their existing beliefs and ideals. As a result, the investor tends to skip or ignore any information that does not match their preconceived notions.
● Oversimplification Bias
Whilst gathering information about your investment options, it is not necessary that everything will be easy to understand. Some concepts and subjects will always be complex and complicated, which is why one should seek expert opinion when necessary. When an investor goes through the oversimplification bias, they tend to only study the easier parts of a particular piece of information and ignore the difficult bits.
● Anchoring Bias
This type of bias stops an investor from learning more about the various investment options that are available for them to choose from. Under the bias, an investor “anchors” onto the first piece of information they find useful about their investment. As a result, other information, especially about the investment’s risks, may be easily overlooked by the investor.
● Restraint Bias
A restraint bias occurs when an investor cannot resist the temptation to invest in certain investments that have been providing them attractive returns for a while. The reason a restraint bias can be problematic is that every investment needs to be planned out, irrespective of how profitable it is, and the patterns of performance are not necessarily permanent. When an investor does not show any restraint, they make quick and rash decisions without enough research and thought, which can turn out to be a disaster.
● Loss-Aversion Bias
A loss-aversion bias affects a lot of investors who have lost huge funds in the stock market in the past. This bias prevents people from making any investments at all out of the fear of incurring a loss. However, this bias can make investors lose out on many potential opportunities to make a profitable investment.
Why Do Investors Choose ULIPs?
As discussed above, investors undergo various types of biases while making their investment choices. Investments can be broadly classified into four types, namely, cash, property, shares, and fixed interest. However, ULIPs are easy to understand, and with a fair bit of knowledge, they can make for great investment plans. Over the last decade, ULIPs have emerged as lucrative investment options, mainly because they are not only ideal for providing market-linked returns but also offer a life cover to the policyholder. The premiums paid towards the policy help the investor build an investment plan over the tenure of the policy and provides life cover protection to the policyholder and their family.
Moreover, with a Tata AIA Life Insurance plan, one can also avoid the hassle of paying multiple premiums and instead just opt for a single premium policy. This mode of premium payment takes the stress out of the investment plan and allows the investor/policyholder to enjoy the benefits of the plan without worrying about making monthly payments.
Tata AIA Life Insurance ULIPs offer diverse investment funds that enable investors to choose based on their specific risk appetites. Furthermore, one can switch between two or more different funds during the investment tenure if they feel that they can enhance their investment’s performance by doing so. Since ULIPs also offer life insurance, the premiums as well as the benefits of the life cover, are eligible for tax* benefits under Section 80C of the Income Tax Act.
It is important to note that the investment option you select depends on your financial goals and financial situation, both of which are subject to evolution. Therefore, you can start investing a small amount in one kind of investment avenue and expand your investment basket at a later stage in life in alignment with the enhancement in your income and savings.
To conclude, a ULIP can be considered amongst the appropriate investments you can make since market-linked returns, though risky, offer higher returns if they are sufficiently planned and consistently monitored. If one chooses to invest in a ULIP, not only do they build a long-term investment plan for their financial goals but also enjoy the protection of a life cover.