Behavioral Biases and Investment Strategies in Mutual Funds Evidence from Karnataka

Abstract

This study explores the influence of behavioral biases on investment strategies among mutual fund investors in Karnataka. Traditional finance theories assume that investors act rationally, but behavioral finance demonstrates that psychological factors often shape financial decisions. A structured questionnaire was administered to mutual fund investors across different districts of Karnataka to measure biases such as overconfidence, herding, loss aversion, and anchoring, alongside investment strategies like systematic investment plans (SIPs), lump-sum investments, diversification, and risk preferences. The data were analyzed using descriptive statistics and Partial Least Squares Structural Equation Modeling (PLS-SEM). The findings indicate that behavioral biases significantly affect investment behavior. Overconfidence bias was associated with high-risk strategies, herding influenced SIP adoption, while loss aversion and anchoring restricted diversification. These results suggest that investor psychology frequently overrides rational financial planning, leading to suboptimal portfolio choices. The study emphasizes the importance of financial literacy and advisory interventions to mitigate the effects of behavioral biases. By focusing on a regional context, this paper contributes to behavioral finance literature and provides practical insights for policymakers, mutual fund companies, and financial advisors.

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