Why Are YOU Afraid of Mutual Funds?

04 April 2023
5 min read
Why Are YOU Afraid of Mutual Funds?
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In recent years, mutual funds investment has become a widespread option for many people.

Traditionally risk-averse investors who used to spend their capital only on FDs and gold have now begun choosing mutual funds. 

The Indian mutual fund industry is snowballing, but Indians still hesitate to opt for mutual funds.

It is because they are worried about their investments' safety or don't trust the financial advisor or company selling them the mutual fund products.

Fear Of Opting Mutual Funds

Most of us are told that stocks and mutual funds are high-risk assets. We are then informed about a distant relative or aunt who lost their entire wealth when they invested in the stock market.

We've learned that investing in FDs and life insurance plans is safer. But do they?

If a bank fails, the RBI guarantees a maximum of one lakh rupees per individual, regardless of how many or how much the FD was worth. 

We trust the bank with our FDs but are hesitant to invest in the same bank. Trading and investing are different. Trading is not for everyone. Most people want to earn fast money, so they do it, put more money in, and lose it all. Investing mandates discipline and patience.

Mutual funds are tools that allow you to invest in various financial assets, such as stocks and bonds. They’re managed by professional fund managers who invest in multiple assets and try to balance their risk.

Let’s read why investors fear investing their money in mutual funds or stocks in India.

5 Reasons why People Avoid Mutual Funds

Here are a few reasons why people are afraid of mutual funds-

1) Lack of Knowledge

Many people do not know how the stock market functions or how stocks are bought and traded. Likewise, many individuals are unaware of how mutual funds operate.

And plenty of people want to make a quick profit. However, one needs to be patient to buy or selling the stock. Mutual funds are an excellent long-term financial option.

Sometimes a random friend recommends a stock, and you buy without researching it. Instead, it would be best to spend some time exploring the business.

For example, examine a business's balance sheet to learn how much the company owes or possesses. So, before making any decisions, gather information about any company to reduce your possibility of losing assets. Of course, one must read about mutual funds, too, as many options exist in the market.

People must know how to analyse data about assets. People can also seek guidance from an experienced advisor who knows the market and is constantly reading about it.

3) Market Volatility impacting Mutual Funds

Most people are frightened of the stock market and its volatility. They think mutual funds are mainly equity-oriented, and their returns fluctuate in line with the stock market.

They are ignorant that debt-related or hybrid funds exist that find a compromise between return and protection.

Investments also included-

  • Gold exchange-traded funds,
  • Fixed funds,
  • Short-term debt funds, and
  • Funds that balance your investment.

Mutual funds may be your best cushion if you have a strict financial strategy when the market becomes unpredictable.

3) Tax Inefficiency

The taxes levied by the Indian government on mutual funds are very high compared to other countries, such as Singapore and Hong Kong, where there is no tax charged on investment returns.

Consequently, it makes it more expensive for investors who want to invest their money in mutual funds. 

While tax efficiency is a concern for all investors, it is especially problematic for Indians because they often invest in non-taxable instruments such as fixed deposits or municipal bonds instead of mutual funds.

Because these investments don’t generate returns that the government can tax, investors can avoid paying taxes on them—but this implies that they also miss out on potential gains that could be generated by utilising tax-efficient investments like mutual funds instead.

4) Previous Poor Fund Performances

Most financial strategies are finalised due to recommendations from family/friends.

If one of them experiences a loss, prospective investors become fearful and withdraw from mutual funds. We must determine the underlying cause for such losses to determine the best course of action.

"Investment decisions should be made with the brain rather than the heart," as the saying goes. The possibility of one loss does not influence the likelihood of returns from other mutual fund plans.

5) Past Records

Another reason why Indians hesitate to choose mutual funds is because of records.

Some investors lost money when they opted for mutual funds that had high returns initially but went bankrupt later on due to poor management or bad decisions by stockbrokers who misguided them into buying some stocks without properly explaining their features and benefits as possible drawbacks.

Conclusion

As the common saying goes, "life isn't a bed of roses," and neither is investing your hard-earned money in mutual fund. There is no single best investment plan. Instead, it is determined by the individual's risk tolerance, age, and objectives.

Nevertheless, the amount of investors choosing mutual fund plans over several years demonstrates mutual funds' popularity.

Whether you are an investor or not, there is a lot that you can learn from the investment market. First, you can learn to be patient, which is critical while investing.

You will also have to wait a long before seeing any tangible results. It takes a median of five years before investors begin to see money coming in on their investments. Fifteen years is considered the typical holding period for most mutual funds. 

If you are looking for immediate results and quick returns, there may be better choices than this.

After all, most people start investing with no expertise or guidance, and many lose money due to a lack of knowledge of how the markets work. However, if you are interested in investing for the long haul, there is no better option than using mutual funds, which will help ensure that your portfolio continuously increases even when the rest of your market falters.

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