Mutual fund (MF) investments are not as simple as opening an account in a bank or putting money in a bank fixed deposit (FD). For example, the State Bank of India (SBI) has about 43 crore account holders, but the SBI MF has only about 1 crore investors, out of which only about 50 lakh investors have accounts in SBI. Although AMFI has launched the ‘Mutual Fund Sahi Hai’ campaign to educate people about MF, but not everyone is rushing to invest, as the AMFI campaign ends up with the statutory warning, ‘MF investments are subject to market risks. Read the offer documents carefully before investing’.
It’s not only about market risks and reading the offer documents carefully, but the need, nature, duration and quantum of MF investments, especially in equity MFs, vary from person to person and investment patterns cannot be generalised.
If you invest in MF in the following way, it may come out to be a wrong choice for you:
Chasing returns by following others
The urge to invest is governed by traits like greed and fear. Most people invest in equities out of greed when markets are very high and existing investors have made substantial gains. However, around the same time seasoned investors pull out sensing that the market is overheated and economic and other indicators pointing towards a market crash, triggering a chain reaction of redemptions leading to steep correction. As a result, inexperienced investors also redeem their funds out fear and end up booking huge losses. Trying to follow a herd that chasing high returns may invite only trouble for you.
So, go by another statutory warning that ‘Past performance is no guarantee of future results’ and avoid following others. Take help of advisors, who won’t get carried away by greed and fear while managing your money.
Investing short-term money in equity
Equity investments are long-term investments. If you invest your short-term emergency money in equity MF, you may see yourself in trouble when the money is needed urgently. It is because the stock markets don’t rise in a linear manner, but fluctuate widely impacting the short-term returns directly. While the long-term average curve moves up, the capital invested fluctuates in short-term term due to market volatility. If you invest short-term money in equity fund, in worst case scenario you may see your capital gets eroded by 50-70 per cent due to steep market correction.
So, never put money needed within 3 years in equity funds, but park the money in suitable debt funds. To eliminate chances of loss, invest in equity funds for at least 5 years and to see substantial gains, invest for 10 years or more.
Investing in equity without realising risk appetite
Equity investment is not everybody’s cup of tea. Don’t follow others to invest in equity funds without realising your risk appetite. If you are a risk averse person, seeing erosion in capital invested in short run may create tremendous mental stress even resulting in health issues, while a risk taker investor may stay calm and cool in such situation.
So, talk to a financial advisor before investing, who would help you realise how much risk you may take and if you need to take any risk to achieve your financial goals. Which will save you from taking unnecessary risks. Better, let an advisor handle your investment and stop looking at the market value of your funds everyday to avoid stress.
Investing without any goal
It is said, ‘if you fail to plan, you are planning to fail’. If you invest in mutual fund without any financial planning, it is highly likely that you would end up choosing funds that are not suitable for you and pull out prematurely booking losses. Without financial planning you won’t realise how much money you would need after how many years to meet your financial commitments and would more likely exit without any substantial gains, if at all.
So, it’s better to talk to a financial advisor to realise your financial goals and invest in those funds for specific durations that would help you achieve the goals by taking minimum amount of risks.
To reduce risks, it is also advised to avoid lump sum investment in equity funds and adopt systematic investment plan (SIP).
Unless you have enough experience of MF investments, if you get carried away by the lure of some adds promising 1-2 per cent extra returns and invest directly without any planning and guidance, forget the 12-15 per cent long-term basic CAGR of equity funds, it is highly likely that you may end up losing substantial amount of capital due to inherent traits of greed and fear.
For novice investors, hand holding is necessary, because managing emotion is more important than managing investments to stay afloat in choppy waters of equity markets to reach the financial goals.