Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. It is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. It utilizes knowledge of cognitive psychology, social sciences and anthropology to explain irrational investor behavior that is not being captured by the traditional rational based models. Behavioral models typically integrate insights from psychology with neo-classical economic theory. There is now a days an increasing debate in theoretical finance between the efficient market hypothesis and the growing field of the behavioral finance This paper analyses the development of Behavioural finance, and how an investors influences selection of mutual fund schemes. The paper analyzes that the most common behavior that most investors do when making investment decision are (1) Investors often do not participate in all product options of mutual fund schemes (2) Investors exhibit loss-averse behavior, (3) Decisions taken by the Investor are based on past performance (4) Investors behave on status quo, (5) Investors' decisions are not always rational in making their portfolios (6) Investors behave parallel to each other, and (7) Investors are influenced by historical high or low returns. However, there are better options available to help investors make better choices and make their investment decisions more efficient. These involve regulations, investment education, and perhaps some efforts to standardize mutual fund advertising. Moreover, a regulation can be made to protect foolish investors by restricting their freedom of making choices.
