Why you should Not invest in Equity mutual funds

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.

best mutual funds to invest

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.


Are you investing in the right mutual funds?

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













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.












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.


Are you investing in the right mutual funds?

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 enquiriesemail us with your doubts at info@themutualfundguide.com

Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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