No, the headline was not a mistake.
Contrary to the most popular opinion in the room these days, there are enough reasons why you should not invest in equity mutual funds.
Either the reasons make the investment an unsuitable source
of investment or may be your expectations are not aligned.
There are enough articles out there explaining why you
should invest in mutual funds.
So this might come across as an aberration, one nevertheless
worth perusing.
Capital Protection
Your capital is not protected in equity mutual funds.
This is unlike what a fixed deposit or other fixed saving
intruments like NSC, SSY, PF, etc. can offer you.
At any given time in an equity mutual fund, your valuation
can be below the initial capital invested.
Meaning there is no guarantee of capital protection unlike
other fixed saving instruments.
This is because equity mutual fund investments are subject
to market risks, meaning any downside movement in the market can cause a
downside slide to your capital as well.
For eg. Lets say you invested 1 lakh, now it is very much
possible for the valuation to be 97,000.
Therefore if you’re someone who prefers your capital being
protected at all times, despite lower returns then equity mutual funds are not
for you.
Additional reading: Click Here to read whether you are affected by the Dilderot Effect
Fixed Returns
As previously mentioned, equity mutual fund investments are
subject to market risks.
The stock market can be extremely volatile in the short run.
Therefore the returns on it are also not fixed.
This is unlike fixed deposits and other fixed saving
instruments like NSC, SSY, PF, etc. where the rate of interest is either
declared at the beginning or periodically updated.
In an equity mutual fund, your returns are dependent on the
market movement as well as the performance of your scheme.
Past performances are no guarantee of future returns.
Therefore if you’re someone who likes to know beforehand
your total returns or prefers fixed returns then equity mutual funds is not for
you.
2-3 year horizon
Equity mutual funds are not for a 2-3 year horizon.
You need a minimum time horizon of 5 years, even more for
more volatile and aggressive schemes.
Equity mutual funds tend to be extremely volatile in the
short run but with time the volatility gets averaged.
For certain schemes, you need even a longer time horizon
than 5 years because the fund can be extremely volatile and therefore needs to
go through various cycles before it stabilizes.
Therefore if you’re not certain you can stick for a long
time and need the money before 5 years then it’s better to stay away from
equity mutual funds.
Cannot generate income
Many individuals are dependent on the interest gained from
their fixed deposits to manage their monthly expenses.
Certain other fixed saving instruments can also provide the
same.
An equity mutual fund cannot provide the same, that’s the
case with Income Distribution cum Capital Withdrawal (IDCW) plan too.
Even under the IDCW option, there is no guarantee you will
receive dividend and when you do, keep in mind that you receive a portion of
your own capital back and not just profits in the form of dividends.
This was the case earlier too which is why the ‘Dividend’
option was renamed as ‘Income Distribution cum Capital Withdrawal’ plan since
most investors weren’t aware that they were receiving a portion of their
capital back as dividends.
The Income Distribution cum Capital Withdrawal should be
avoided at all costs since it serves no real purpose.
If you want to generate some sort of income from equity
mutual funds then the better option would be to go for Systematic Withdrawal
Plan (SWP) in such a manner that your capital is diluted very little.
In such a case too you will first need to make sure that
your capital stays invested for a long time so it can generate some sort of
returns before you can apply the SWP method.
Therefore if you’re someone who’s dependent on your
investments to generate income then equity mutual funds should be avoided.
Additional reading: Click Here to read Why you should not invest in Dividend options of Mutual Funds
Volatility
|
Date |
Closing |
|
01/01/2010 |
16,357 |
|
01/12/2011 |
15,454 |
|
01/05/2012 |
16,218 |
|
01/12/2015 |
26,117 |
Sensex grew around 10,000 points from 1st January
2010 to 1st December 2015 but the growth was never linear.
It had its fair share of downs too which can be inferred by
its closing on 1st December 2011 and 1st May 2012.
Even though it might seem as if your equity funds made
massive gains from 1st January 2010 to 1st December 2015,
in reality though it was very volatile in the first two years.
A similar case can be made of the Sensex for the period from
1st January 2015 to 1st December 2020.
|
Date |
Closing |
|
01/01/2015 |
29,182 |
|
01/05/2016 |
26,667 |
|
01/04/2017 |
29,918 |
|
01/12/2020 |
47,751 |
The market can be very volatile in the short run, so much so
that it is also possible for you to see negative returns after 2-3 years.
It is easier to have faith when both the markets and your
funds, both are on the up.
But if you’re someone who cannot handle volatility and
prefers fixed returns from his investments in a linear manner then equity
mutual funds is not for you.
Too many
options
There are more than 40 registered AMC’s offering together
more than 2,000 schemes with both numbers only going to rise in the future.
Today mutual funds as a form of investment are gaining more
acceptance than ever as a form of investment.
This means it gets more coverage from the media, more
articles published on them and the number of so called ‘experts’ on them also
multiplying irrespective of whether they are certified to advice on them or
not.
All of this means you have too many options to choose from,
deciding where not to invest and whom not to listen to is eventually going to
decide whether you make meaningful gains or not.
Your success is not dependent on whether you choose the
‘best funds’ but rather if you have a sound strategy in place but that is only
possible if you as an investor have a strong filtering process.
There will always be new fund launches, everyone will have an
opinion on where you should invest and news articles will keep publishing
articles claiming either the markets are about to go bust or generate
insurmountable wealth.
If you’re unable to filter out the unnecessary outside noise
and stay aligned with singular professional advice then it is better to stick
with regulated and fixed saving instruments than go for equity mutual funds.
Equity mutual funds are a great source to generate long term
wealth but they only make sense when you are in it for the right reasons and
have the risk profile that suits the nature of the equity markets.
Remember, the equity markets are under no obligation to make
sense to you so you either adapt or stay out.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
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