People often see scared of investing in mutual funds for fear of losing money. To them, it is a scary investment instrument which is not entirely foolproof as fixed income securities are. It is still a taboo investment option for a lot of people. Plus, if you watch television then you must’ve seen the ads of mutual funds ending with information – “Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before investing.” But, there are reasons why people lose money in mutual funds.
In this article, we will help you to understand the reasons behind losing money in mutual funds. Let’s find out.
Why People Lose Money in Mutual Funds? – Reasons behind it.
It has been noticed that many people do not wish to invest in mutual funds and prefer to stick with the fixed deposits (FDs) and recurring deposits (RDs). Plus, most people shut the doors when they lose money in their investment and seldom look back to know why they lost money.
They don’t even bother trying to find the reason – whether they were wrong or were the markets?
It is a matter of thinking about in the stock market or in a product like a mutual fund if the market/product were wrong then why people keep investing in it. Why it has been recognized as one of the top 10 investment options in India. It is because most of the times – the fault lies with investors.
The most obvious reasons why we lose money in mutual funds are as follows:
The most common reason for losing money in mutual funds is not dedicated time to it. This leads to compounding errors –
- To set wrong return expectations like expecting almost double-digit returns in a very short period of time.
- Selecting unsuitable products.
- Exit at wrong times especially after panicking when the markets are down soon after your investment.
Plus, to get a decent return you need to invest in a mutual fund for at least 3 years or more. Or should we say, decide a financial goal which not only automatically put a time frame on your investment but also let you select the right product which will meet your time frame and your return expectations?
Unable to Differentiate Between Investing and Trading
What we’ve noticed that many investors say that they are holding an investment for “long-term” but they buy a fund/share in believing that it will boom right away. But, if it doesn’t – they sell it right away. Some who have been investing directly inequities in the stock market and come to mutual funds look for net asset value (NAV) to invest in. They monitor the funds for their 52-week highs and lows.
But, honestly, these are definitely not investment strategies and will not fetch you money. If you do it on a frequent basis, you could really harm your portfolio. Besides mutual funds is an investment option not for trading reasons.
So, don’t try to achieve your long-term goals on a short-term basis.
An investor must always know when to exit out of the investment. As for systematic investment plans (SIPs), if someone is getting a single month’s 2-3% increase in net asset value (NAV), then there is no need to exit. It hardly matters seen from a longer time frame.
A smart investor would only exit when he/she near the goal or fund/stock is really an underperformer.
Unreliable Fund Managers
As we were talking about the faults, either the fund is not performing well or investor is not handling it properly. But, sometimes there are other reasons for losing money in mutual funds. One common example is an unreliable fund manager. Fund managers are those who handle your money on your behalf. These fund managers are appointed by the fund houses or brokerage firms. While most fund managers are really good at their jobs. But, some fund managers tend to take hasty decisions leading to a loss.
Just in case, it doesn’t happen to you, make sure you inquire about your fund manager. In doing so, you or let some professional do a performance check, check for past performances to see the capability. Although not two funds are alike, it will help you to understand the fund manager.
Unrealistic Expectations Regarding the Profits & Returns
Greed for high profits and returns is very common for investors. Most investors have some potential return in their minds. Even though expecting is good, but it is not always achievable in this fluctuating market conditions.
If someone gets 15% on his/her mutual fund and expected around 25% returns then it won’t be fair. There would be times when you get returns as high as 25 per cent and times when you get less than 15% in a year. So, exiting a fund just because it gave you low returns will only lead to more loss.
Sooner you accept this fact, the easier it would be for you. So, always expect returns as high as your risk of tolerance.
Hope, this article gives you the necessary information you needed regarding losing the money in mutual funds. If not, then please don’t forget to mention in the comment section below. We will be happy to have your feedback on this one.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.