I am an avid investor.
A few months back, I wasn’t.
In fact, I was as sceptical as you were (its true).
“Will I lose my money? What if the expense ratio increases? Are equity funds too volatile?” these were the questions that haunted me constantly.
Obviously something changed and I started investing in mutual funds.
Do you know what that something was?
It was the concept of investing without fear.
If you ask me, most Indians are not just hesitant, they are pessimistic about investing. Honestly, there are false notions that harbour the economic market.
In this article, I will address why all of us are scared of investing in mutual funds and how investing in this instrument can change your financial future for the better.
So, let’s get started.
In this article
Why are Indians scared to invest in mutual funds?
1. The risk factor
So, let’s address the elephant in the room.
We’re all scared to invest in mutual funds because we’re afraid of losing our money. Which is fair.
However, have you realized that every investment avenue holds a certain amount of risk?
Even securities like fixed deposits can reduce by a percentage or so due to many reasons.
And mutual funds are always recommended for long-term investment so that your risk can be spread out over a period of time.
The 2008 recession is a perfect example of this phenomenon.
2. Past Records
Suppose you want to start investing in mutual funds and you find that there’s a drastic drop in returns, you would probably drop the idea and invest in another avenue.
This is exactly what you shouldn’t be doing. For example.
|SBI Small Cap Fund Returns|
If you look at the returns from this fund you probably wouldn’t want to invest in it, because of returns for the first year is negative.
That’s not the right way to go about it.
Small-cap funds have an ideal duration of 5+ years, hence the fund should be assessed from that perspective.
So don’t jump into conclusions, analyse all the aspects.
3. It is too volatile. Or, is it?
Most Indians have an inhibition that mutual funds are extremely volatile and they fluctuate according to the economy.
Wrong notion. Not all mutual funds are volatile.
There are various categories of funds and each has a varying degree of volatility and risk.
Heard of debt funds?
These are safe, not very volatile and give much better returns than fixed deposits.
Mutual funds need not just be of the equity kind. There are various categories of funds that are stable in nature.
The reason why I am writing this article today is because of one reason.
Most investors are ignorant about mutual funds. They feel that it would be a risky bet and not a suitable instrument for saving.
The funny part is that investors would rather invest in options like fixed deposits and recurring deposits, which give low returns, but wouldn’t invest in debt funds, which have very little risk, give more returns and are relatively stable.
Now that I have spoken about why people do not invest in mutual funds and demystified certain theories, let me give you four reasons as to why you absolutely should invest in MFs
1.Diversification of portfolio
If you want to become a successful investor, you need to garner decent returns from your investments, which practically means that you need to keep a check on your risk level.
Through mutual funds, this process becomes easier, because MFs invest in stocks and bonds.
This stabilizes your portfolio to a great extent.
Let me give you an example
Suppose you live in an area which is prone to natural calamities, it is always better that you have extra ration, just in case.
Similarly, with regards to investing, it is better to invest in different categories so that your risk is spread out.
Investing in direct mutual funds is quite inexpensive. There are no brokers involved in the procedure and the returns you earn are your’s alone.
In fact, direct mutual funds have a less expense ratio and that is the money you have to provide the AMC as managing fee.
Platforms like Groww let you invest in funds without any hassle and they are completely free of charge.
3. Relatively stable
Mutual funds are more stable than direct stocks because they do not have full exposure to equity.
This medium spreads investments across different market capitalizations, which ultimately reduces risk, as compared to direct stocks.
Debt and liquid funds, on the other hand, are low-risk funds.
These funds are suitable for any investor who does not want to enter the big bad world of equity.
4. Tax Benefits
How many of you knew that mutual funds are tax saving instruments as well?
ELSS or equity-linked saving schemes are tax instruments under Section 80 C which provide tax benefits up to Rs.1,50,000.
That’s right. Move over New Pension Scheme (NPS) and Public Provident Fund (PPF).
ELSS schemes give you higher returns, have a lock-in period of just 3 years and stabilize your financial portfolio vastly.
Every successful investor will tell you that you need to overcome your fear and venture into something big.
You were probably scared of doing a lot of things.
Like riding a cycle when you were 6, moving to a new city when you were 18, or starting a new job when you were 22.
So snap out of your comfort zone (FD and PPF). Get on par with the generation. Invest. Groww.
Disclaimer: The views expressed in this post are that of the author and not those of Groww