Using AI to Make Mutual Fund Investments? Read This First

Generative AI chatbots like ChatGPT and Gemini, with their ability to process vast amounts of data and execute tasks at speeds beyond human capability, have led people to worry about losing their jobs. Among its many applications, AI is being increasingly used for guidance on personal finance.

A study has indicated that gen AI-enabled applications could become the leading source of retail investment advice in 2027.

On the surface, this may seem impressive - you have a digital assistant that's available 24/7, capable of analysing market trends, crunching numbers, and suggesting investment options in seconds --saving time, cost, and effort that would otherwise go into finding a trustworthy financial advisor.

But does reality hold up to this rosy picture? Can these AI tools be relied on to handle something as nuanced and critical as mutual fund investments (and other aspects of financial planning)?

The answer is a resounding No!

Imagine visiting a dietician who provides a generic meal plan without bothering to probe into your medical history, personal goals, or allergies. And then offering the same advice to everyone else. Similarly, investing is a highly individualistic exercise and not a one-size-fits-all approach.

Here's why AI tools cannot take the place of a professional and experienced investment advisor...

• Lack of Personalisation

  AI tools analyse historical data, trends, and user inputs to generate investment recommendations.

  For example, if you ask ChatGPT about the top-performing mutual funds, it may provide you with a list based on past performance metrics.

  Alexa and similar voice assistants can fetch financial news, summarise fund performance, or set reminders for portfolio reviews. However, while AI tools may provide some useful insights, they fall short of understanding the nuances of individual financial goals, risk appetite, and the time horizon of investments.

  A sound investment strategy results from a healthy discussion between an advisor, and you, the investor. You may provide the basic information, but it is up to a skilled advisor to ask the right questions to create a tailored portfolio.

  In contrast, AI tools are reactive. They provide answers based on the questions you ask. If you ask for high-risk high-reward mutual funds, that's what they'll suggest. They won't probe deeper to understand if such funds align with your financial goals, risk tolerance, or life circumstances.

  [Read: How Robo-Advisory Is Influencing Investors' Perception And Way of Investing]

  A human advisor, on the other hand, will actively engage in dialogue, challenge your assumptions, and help you understand the implications of different investment choices.

  They can identify potential blind spots in your financial planning that you might not have considered, ensuring your investment strategy truly serves your long-term interests.

• Absence of Emotional Intelligence and Empathy

  An AI chatbot cannot address the emotional aspects that often accompany financial decisions. Even with all the rules written down, many people need regular counselling or risk falling off the wagon.

  Moreover, during a market downturn, an investor may panic and think of selling their mutual funds. AI lacks the emotional intelligence to counsel investors during such times, whereas a human advisor can provide reassurance and a rational perspective.

  A skilled advisor understands that market volatility can trigger strong emotional responses and knows how to guide clients through turbulent times. They may even share real-world examples of similar situations they've helped other clients navigate, providing valuable perspective and comfort.

  This human element is crucial in maintaining investment discipline and preventing impulsive decisions that could derail long-term financial goals.

  AI tools, while sophisticated, simply cannot replicate this level of emotional support and experiential wisdom.

• Inability to Adapt

  Mutual fund investment strategies need to evolve with life changes. For example, if you experience a job loss or start a new business, your investment strategy has to be reevaluated.

  While AI tools can suggest portfolio adjustments based on historical data, advisors provide customised insights for your changing circumstances.

  They understand the broader context of your financial journey and can proactively suggest adjustments before life changes impact your investments.

• Over-Reliance on Historical Data

  AI models rely heavily on historical data to predict future outcomes. This backward-looking approach is problematic in a field like investing, where past performance is not always indicative of future results.

  Unthinkingly following AI-generated recommendations can lead to costly suboptimal decisions, especially in volatile markets. Market conditions can change rapidly due to unforeseen events, geopolitical shifts, or changing economic policies.

  An advisor can interpret these changes in real-time, considering multiple factors beyond historical patterns. They can also identify emerging opportunities or potential risks that AI systems might miss due to their reliance on past data.

• Potential for Bias in Recommendations

  AI systems are only as good as the data they are trained on. If they're trained on biased data, their recommendations will reflect those biases. This could result in skewed investment suggestions that may not align with market realities or your best interests.

  Additionally, AI systems might favour certain financial products or strategies based on their programming, rather than what's truly optimal for your situation. ChatGPT itself clarifies that it is capable of offering only general information and cannot provide customised financial advice specific to individual requirements.

  When questioned about its competence in delivering personalised investment advice, ChatGPT responded with, "I can provide general information and guidance on various investment topics based on principles, trends, and strategies. However, I am not licensed to offer personalised financial or investment advice. It's always best to consult with a certified financial advisor who can take into account your specific financial situation, goals, and risk tolerance."

  That said, consulting with human advisors also carries a degree of concern.

  You may not always know the credibility of an advisor, their qualifications, or whether they are truly acting in your best interest.

  Some advisors may only be interested in selling you specific products or services (that may earn them higher commissions) and unfortunately, scams are not unheard of in the industry.

This is why it is essential to consult SEBI-registered investment advisors.

SEBI (Securities and Exchange Board of India) registration ensures that the advisor adheres to strict regulatory guidelines, upholding transparency and ethical standards.

These professionals provide independent, unbiased financial advice and can help you build a diversified investment portfolio that suits your financial goals and risk tolerance.

To Conclude...

AI chatbots like ChatGPT and Gemini can enhance your financial knowledge and provide general guidance, but they should not be relied upon for making significant investment decisions.

The capabilities of AI are powerful, but like any other instrument, it can cause more harm than good if misused. Investing is a highly personalised endeavour, requiring an understanding of individual goals, risk tolerance, and changing life circumstances - elements that AI cannot fully grasp.

For tailored and reliable investment advice, always turn to a SEBI-registered advisor.

Check your advisor's SEBI registration number and ensure they have a valid registration certificate to protect your investments and peace of mind.

Happy investing!

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.