Why do you lose money when you invest in mutual funds?

Worry

Sometimes it is the wrong expectation or the wrong time frame that acts against the possibility of making money. Investors also err when they take trading as investment.

“I lost money in mutual funds. I do not wish to invest there again. I am happy with what my fixed deposits give me”. This was what a neighbour in my colony told me, soon as he heard that I research mutual funds.

Naturally, when we burn our fingers – our first reaction is to shut the doors on that option. In investment too, we seldom look back to know why we lost money.

Were we wrong, or were the markets? If you had invested in a ponzi scheme, evidently the product was wrong (although investors are almost equally at fault most of the time).

But in equity markets or in a product like mutual fund, if the market/product were wrong then why does it continue to have people investing and making money? Why is it that internationally they are known to be proven vehicles to build long-term wealth?

Let me be candid: the fault – most of the times – lies with investors and none else. Here are a few obvious reasons I could think of, on why we lose money when we could well have avoided it.

Not having a time frame to invest

Not having a time frame compounds your errors. One, it makes you set wrong return expectations (like expecting double digit returns in a short period); two, it pushes you to choose unsuitable products (choosing an equity fund for a 1-year time frame) and three it prompts you to exit at wrong times (panicking and exiting when markets are down soon after you invest).

Having a goal naturally puts a time frame for your investments and helps you choose the right product in line with your time frame and return expectations. Hence if you have a goal, power to you.

But if you do not have one and simply wish to save, then your minimum time frame has to be in line with the minimum ideal time frame for the product you choose. At least a 5-year time horizon for an equity fund or not less than 3 years for an income fund and so on are basic rules that you need to follow. No point blaming the product when you did not follow the investing rules for it.

Not knowing that trading and investing are different

Many investors start by saying they will stay ‘invested’ for the long term but they buy a fund/share hoping it will zoom right away ; if it does not – they sell it. A few others, who have been investing directly in the equity market and come to mutual funds, look for ‘low points’ of NAV to invest in. They watch the funds steadily for their 52-week highs and lows.

Then there are others who stop their SIPs when the market moves a bit one month, thinking that they should not be averaging at higher costs.

These are certainly not investing strategies and will not also fetch you money. They only delay the process of building wealth and often times harm your portfolio. Besides, products such as mutual funds are simply not built for ‘trading’.

If you are an investor, the only reason why you exit should be when you near your goal or your fund/stock is really an underperformer vis-a-vis the market.

As for stopping SIPs, there can be no single reason to compel you to do it. A single month’s 2-3% increase in NAV cannot do your averaging any harm, and will hardly
matter seen from a longer time frame. All you would end up doing by stopping SIPs on and off is save and invest less.

Not having a perspective on returns/return expectations

“I got only 15% on my mutual fund. I expected at least 25% returns. I don’t want to invest more” is not an uncommon statement. So what are your other options for getting that 25% return?

Unregulated lending/chit fund schemes? Let’s look at returns relatively. You are happy with your PPF returns, with your FD returns but unhappy with your equity returns? Why?

Because there is no guarantee. But it is precisely for the risk that you take that you are rewarded far higher returns than the other options. Hence, you will do well to see how much you get over your other options or simply over inflation, rather than setting a number that perhaps has no basis.

When you do this, you will not only realise whether you get ‘good’ returns but also know how much you need to fine tune/improve your savings than expect the market to generate a miracle.

As for this gentleman who told me that he does not like mutual funds, he also disclosed to me a market-linked insurance plan in which he lost money. And he thought it was a mutual fund.

– Vidya Bala

Originally at http://www.moneycontrol.com/master_your_money/stocks_news_consumption.php?autono=1816621

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Wed 09 Sep 15

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