The 'Recency Bias' Trap: SIP Investors Beware!

Imagine this:

A mutual fund delivers 40% in a single year. Suddenly, everyone’s talking about it. Blogs are buzzing. Friends are Investing. And you—seeing this momentum—start a fresh SIP.

Fast forward two years. Returns drop. NAV falls. You panic and pause your SIP.

This is Recency bias in action.

Recency bias is the tendency to overemphasise recent events while ignoring the long-term average. In Mutual Fund Investing, this can lead to:

• Chasing top performers of the last 1 year
• Abandoning SIPs during temporary underperformance
• Shifting funds too frequently

Let’s understand how this bias impacts SIP investors—and how you can avoid falling into the trap.

What is Recency Bias?

Recency bias is a behavioural finance concept where recent outcomes dominate your decision-making, even when irrelevant to the long-term picture.

In the context of SIPs, investors often:

• Start SIPs in trending funds just because they topped charts in the past 6–12 months
• Pause or exit SIPs if the fund underperforms for a short stretch
• Shift to another fund showing short-term returns

The truth? All funds go through cycles—no fund can outperform every year.

Real-Life Examples from Indian Mutual Fund History

Example 1: Small-Cap Mania (2017–2018)

• Small cap funds gave >50% returns in 2017
• Massive SIP inflows followed in 2018
• But the category fell sharply in 2018–19
• Many investors exited in losses

Example 2: Pharma Fund Rally (2020–2021)

• Pharma Mutual Funds outperformed post-COVID
• Recency bias led to heavy SIPs in 2021
• Returns stagnated in 2022 as momentum faded

Example 3: Tech & New-Age Fund Frenzy (2021)

• Funds betting on new-age tech companies boomed after IPOs
• Investors jumped in post-listing
• 2022 correction eroded many of these gains

These cycles show that acting on recent performance alone is not a sustainable SIP strategy.

The Cost of Recency Bias in SIPs

Let’s assume two investors:

• investor A follows a disciplined SIP in a diversified Equity Fund for 10 years, ignoring short-term returns.

• Investor B hops from one trending fund to another every year based on past 1-year returns.

Historical data shows that Investor A tends to outperform Investor B by 1.5%–2% CAGR over 10 years, simply by avoiding timing errors and emotional decisions.

Moreover, excessive fund switching causes:

• Exit loads
• Taxation (especially short-term Capital gains)
• Disruption of compounding

How to Avoid Recency Bias in SIP Investing

Look at Rolling Returns, Not Just 1-Year Returns

• Check 3-year and 5-year rolling returns to judge fund consistency.

Stick to Your Asset Allocation

• Don't shift allocation due to temporary underperformance of one Asset Class.

Focus on SIP Discipline, Not News Flow

• SIPs are built to ride Volatility. Stopping them during corrections kills long-term returns.

Use Fund Ratings with Caution

• A 5-star rated fund today could be 3-star next year. Don’t make SIP decisions solely on ratings.

Review, Don’t React

• Review SIPs every 6 or 12 months. Don’t overreact to 1-month NAV declines.

Pro Tips to Stay Rational

• Use SIP top-up instead of switching—invest more in existing funds during Market dips.
• Set goal-linked SIPs. If your SIP is tied to your child’s education or retirement, you’re less likely to stop it prematurely.
• Avoid social media hype. A trending fund is not necessarily a lasting performer.
• Use robo-advisors or professional platforms to automate decisions.

Conclusion: Keep the Long-Term View Clear

SIP investing works best when you stay invested through all market cycles. But recency bias clouds this strategy, making you chase winners and dump laggards—both of which hurt your long-term returns.

Train your mind to zoom out. Look at long-term trends. Trust your original Asset Allocation. And remember: SIPs are a marathon, not a sprint. Because smart investing isn’t about reacting to yesterday. It’s about planning for tomorrow.