Why people lose money in Equity Mutual Funds
Pick any given 10-year time frame for the NIFTY (India’s benchmark stock market index), and you’re likely to discover that the index has grown between 12 and 15% (compound annualized) during that period. Similarly, top ranked Equity Mutual Fund Investments also boast of impressive returns over longer time frames – when it comes to long term investments, Equity Mutual Funds Sahi Hai!
Ironically, despite this impressive track record, Equity Mutual Fund investments are still viewed with suspicion by many segments of the retail investment community, who seem to think of them to be speculative in nature. Here are the top 5 reasons why retail investors tend to lose money in Equity Mutual Funds. Avoid these, and you’ll be on your way to creating wealth from the stock markets.
Buying Due to Greed or Euphoria
This would surely rank as the number one reason why retail investors lose money in Equity Mutual Funds. Most institutional investors (the ones who make money in the long run) scout for buying opportunities (“bottom fishing”) after markets have fallen considerably. That’s probably they end up reaping rewards from the markets. However, bear in mind that the stock markets are essentially a ‘zero sum game’ – so where there’s a seller, there’s a buyer. Most institutional players make money at the expense of the hapless retail investor, who rushes in to buy stocks after they’ve already escalated dramatically. The key driver behind this unfortunate phenomenon is greed or euphoria, which clouds rational judgment. Think about it – do you really want to be buying when a professional investor is selling? Do you know something they don’t?
Selling Out Due to Hype and Fear
Euphoria’s evil twin is fear. Remember, there will always be someone on TV who’ll be making doomsday predictions – most likely, AFTER the markets have already dropped considerably. The truth remains that it’s near impossible to predict short term movements. Don’t sell your Equity Mutual Funds out of fear after they’re already fallen, thinking that you’ll ‘jump back on the wagon’ at the right time, when things bottom out. You never will, and you’ll likely miss the trend reversal and sit on the sidelines!
Churning & Burning
Equity Mutual Fund Investing success is synonymous with patience. Once you’ve done your research, analyzed and shortlisted the funds, consulted with your advisor and bought your stocks, be sure not to churn them in a hurry. Moving in and out of Equity Mutual Funds because ‘there’s a better opportunity available’ or ‘there’s a new fund on offer’ isn’t a wise strategy. It’s best to hold on to good Equity Mutual Funds for the long term.
Markets will not move according to your whims and desires. In fact, there may be extended periods of time that prices will stay depressed in spite of the overall economy improving. Even worse – there may be some categories of Mutual Fund Investments that run contra to the market, and therefore may not do all that well even when the broader markets are rallying! Once again, if you have conviction in the fund’s strategy and investment decisions, exercise patience. You don’t want to exit in a hurry and watch the same fund’s NAV race ahead after you do.
Checking NAV’s Obsessively
Whatever you do, do NOT check your Mutual Fund Investment portfolio obsessively! Aim to check NAV’s once a fortnight and not more. Obsessively checking prices will surely lead to losses in your portfolio, as you’ll literally be inviting a host of behavioural biases to push you into taking irrational investment decisions. Remember, Mutual Funds Sahi Hai – but their NAV’s don’t move in a linear fashion.