Why inexperienced mutual fund investors end up losing money?

Equity investments are subject to market risk, but in the same market, some investors become rich and some end up losing everything. One may wonder why? It is nothing but difference in mentality.

Although equity mutual funds (MF) are managed by the teams of professional fund managers, but such funds also get affected by market volatility, especially in the short term.

Investment pattern of most novice investors are governed by human traits of greed and fear. Most investors don’t realise that equity investments are not just filling forms and putting money, but need lots of study, time and patience. For new investors, determination of motive of investments or identification of financial goal is also important before choosing funds and staying invested till the goal nears.

So, financial planning is very important to determine how much to invest in which fund for how long to achieve the goals to stay calm during the short-term turmoil.

However, most of new investors enter the equity market without any planning and without realising how much risk they need to take or how much risk they are capable of taking in the most risky fund in a rising market.

This behaviour is fueled by greed as they invest after seeing that the existing investors have gained handsomely in a rising market and put money in the fund that occupies the top spot by taking undue risks.

It is obvious that while the most risky fund that occupies the top spot in overheated market would end up at bottom of the chart when the market corrects. When the correction happens, fear grips the inexperienced investors and they get panicked by seeing their capital getting halved or even less and pull out at the down market, booking the loss.

After getting their fingers burnt, they not only suffer from equity phobia, but make others phobic also.

So, before choosing a fund, an investor should first realise if he is a risk-taker or risk-averse. While risk-takers usually stay relatively calm during market turmoils, but they too first determine how much risk they actually need to take to achieve their goals and choose the fund accordingly, and should never select a fund by just scanning through the list to see which fund is at the top in a rising market.

“There are many ways to measure how risky a fund is. While ratios like Variance, Standard Deviation and Beta measure the risk, risk-adjusted returns are measured by Sharpe Ratio, Treynor Ratio, Sortino Ratio, Jenson’s Alpha and other means,” said Financial Coach & Corporate Trainer Prof. Rahul Ranjan.

So, if you are a new investor and don’t want to loose money, take time to determine your financial goal to know how much risk you should take to reach the goal within time and then study a fund carefully before investing in it. If you don’t have time and patience for so, take the help of a professional financial advisor or approach an experienced MF distributor, if you don’t want to end up as a loser.