You must have been watching and hearing lot of ads on mutual funds with Mutual Funds Sahi Hai campaign. In this article, I want to write about few points on why mutual funds might not be right for you.
In this article
- 1. Equity Mutual Funds Sahi Nahi Hai for Short Term
- 2. Sector Mutual Funds Sahi Nahi Hai for beginners
- 3. Lumpsum investment in Mutual Funds Sahi Nahi Hai for beginners
- 4. Mutual Funds Sahi Nahi Hai if you are trying to time the markets
- 5. Mutual Funds Sahi Nahi Hai if you are being mis-sold by agents
- 6. Mutual Funds Sahi Nahi Hai if they are not aligned with your goals
- 7. Mutual Funds Sahi Nahi Hai for frequent trading
- But Mutual Funds Sahi Hai
1. Equity Mutual Funds Sahi Nahi Hai for Short Term
A lot of people come and ask that they want to earn 20% return in the next 3 to 6 months. This is an unrealistic expectation from mutual funds. One can make a lot of money, in the long run, using mutual funds thanks to compounding. However short periods and very high returns
However short periods and very high returns is not what mutual funds will give you. In fact, beware. Most options that promise such returns in very short durations are either very risky or are scams.
2. Sector Mutual Funds Sahi Nahi Hai for beginners
Some of the sector mutual funds have become popular. Riding on the back of past performance, sectoral mutual funds like pharmaceutical mutual funds are a favourite of many a novice investor.
Sectoral mutual funds require great knowledge and in-depth understanding of the sector. Only if you have the requisite knowledge should you opt to invest in sectoral mutual funds. You should definitely not invest in it if you are new to investing in mutual funds.
3. Lumpsum investment in Mutual Funds Sahi Nahi Hai for beginners
Lump sum investments need a good insight of the market. When the markets are high, you might lose money in the short term if you invest in a mutual fund. On the other hand, if the markets are low, you can gain a lot very quickly too.
Again, this requires skill and understanding of the market. To deal with the lack of the said knowledge, it is better to invest using the SIP method. In SIP, you invest a fixed amount in mutual funds in a regular manner.
What this tends to is average out your investments. In times when the markets are high, you pay a high price, while when they are low, you pay a low price. In the long run, this ensures that you do not pay a very high price for a mutual fund.
4. Mutual Funds Sahi Nahi Hai if you are trying to time the markets
Mutual funds are ideal for investing in the long term. Mutual fund investments are best not treated like trading derivatives. The value of shares rise and fall based on market demand, book value, profits, revenue amoung other factors.
On the other hand, the value of individual units of mutual funds (also called NAV) are driven solely by the book value of the mutual fund. Investor demand cannot cause the price of each unit to change.
Yes, if market conditions are down, the NAV might fall and the reverse might happen if the markets are high. However, you must remember, if you’re new, you’re probably not skilled enough to time the ups and downs of NAV.
5. Mutual Funds Sahi Nahi Hai if you are being mis-sold by agents
Agents sell you mutual funds where they get the most commission.
When you invest in a mutual fund, a part of the expense ratio is paid to the broker as commission. This commission is different for different mutual funds.
Brokers and dealers often try to sell you mutual funds that get them the most commission instead of the ones that get you the best returns.
6. Mutual Funds Sahi Nahi Hai if they are not aligned with your goals
Buying an equity fund to park your emergency needs does not make sense. Likewise, money that you don’t need for a long time should not be parked in low returns mutual fund.
Mutual funds offer various kinds of returns. There are ones with high returns but they come with higher risk too. Conversely, there are mutual funds with low returns while carrying low risk with them.
Depending on your financial situation, you should invest in mutual funds that are aligned with your risk profile.
7. Mutual Funds Sahi Nahi Hai for frequent trading
As mentioned before, mutual funds are ideal for investing in the long term. Mutual funds are managed by fund managers who lead a team of skilled and trained professionals. These teams research and invest with long-term gains as their primary goal.
It is not a good idea to move money in and out of mutual funds too often. More often than not, it might lead to losses.
Many people review their mutual funds too often. In doing so, they observe the ups and downs in the value of their investment and panic. That panic is followed by selling early.
It is best to invest in mutual funds and review them once or twice a year at best. Checking too often will only lead to panic and early selling which may result in a loss.
But Mutual Funds Sahi Hai
So far we discussed why mutual funds are not right for you. However, there are a number of reasons are mutual funds are very good.
You can start with very small amount
You can start with an amount as low as ₹500 a month.
Your money is not locked up*
It is a common misconception that mutual funds have a lock-in period. Open-ended mutual funds do not have any lock-in period. You can invest and redeem your money any time you wish to.
*Except for ELSS where your money is locked for 3 years
You can choose between Long term or Short Term
Different types of mutual funds are suited for different types of people. There are ones that are best for investing in the short time and conversely, there are ones that let you remain invested for a long period of time.
Generally, when investing for the short term, it is recommended you invest in low risk low return mutual funds. If you want to invest for the long term, you can go for high risk high return mutual funds.
Try groww for your mutual fund investments.