5secrets | Why Investors will never make money from Equity Mutual Funds?
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Why Investors will never make money from Equity Mutual Funds?

Why Investors will never make money from Equity Mutual Funds?

These days the awareness about Mutual Funds and SIP’s is much more than what it was around 10 years ago. New investors get attracted to SIP’s and the huge returns that are presented to them. They start with a SIP for a small amount like Rs.1000, invest regularly for a few months and invariably get disillusioned cause they realize that their monthly SIP has not made them a millionaire as they thought it would, worst still, it has made them poorer. From there starts the phase of doubt and uncertainty – Have I invested in the right plan? Is the amount allocated right? Can I get better returns on some other plan that’s promising higher return? Should I change the AMC? And many more. What one fails to understand is that one needs to stay invested for a minimum period of 5 years to make any reasonable returns from Equity Investments.

According to the Q-on-Q data published by AMFI, more than 70% of investors stay invested for less than 2 years and hence chances are that they will not make modest returns on their investments. It requires a minimum of 5 years of staying invested to make good returns from Equity. In a situation where they have stayed invested in the fund for less than two years or even switched to other Equity Schemes, their returns might still be sub-optimal

What the above graph means:

  • 4% of Equity Investors stay invested for less than a month
  • 2% of Equity Investors stay invested for only 1-3 months
  • 5% of Equity Investors stay invested for only 3-6 months
  • 9% of Equity Investors stay invested for only 6mts -1year
  • 1% of Equity investors stay invested for only 1-2 years

While we do not have data for the remaining 28.6% investors who stayed invested for 5 years or more it has been observed that in the last 4 years percentage of investors holding onto equity for more than 2 years is gradually declining.

There could be multiple reasons why this could be happening:

  • Flexibility offered by Mutual Funds, where investors can enter and exit at any time.
  • Too many choices available – with over 40 categories of funds by 40 AMC’s and over 2000 schemes, an investor can get overwhelmed by the options available. It is human tendency to look around and keep trying newer options.
  • Inability of the Financial Advisors / Distributors to control the indecisive investor behavior.

If 70% of the Investors are not making a reasonable return on the investments, there will be an increasing sense of disinterest in the capital market. This could lead to discontent about Equity as an asset class and hence lesser inflow into Equity Mutual Funds.

The equity cycle is like a wave, it goes up and down and up again. Unless one does not ride the wave one will not hit the shore. The only solution in sight for investors to get handsome returns from their Equity Mutual Fund investments is ‘Be Patient and Stay Invested’ for 5 years. If one finds it difficult to be disciplined about the investments then opt for less flexible products such as National Pension Scheme (NPS), where you are forced to lock your funds till the age of 60. And if nothing else works God bless them with an Advisor who is able to control their emotions and help them reach their financial goals.

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