04 Oct 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% investors stay invested for less than 2 years and hence chances are that they will not make modest returns on their investments. Remember; 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.
- 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. If 70% of the Investors are not making 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.
If investors want handsome returns from their Equity Mutual Fund investments then the one simple rule is ‘Be Patient and Stay Invested’ for 5 years.
Easier said than done! The problem gets compounded when the investor has excessive choice. Over 2000 schemes across 40 plus categories offered by 40 different AMCs. The level of flexibility in entry and exit makes it difficult for the Advisors / Distributors to control the behaviours of the investors
It is better for investors to choose a rigid product like NPS where they are locked in till 60 years of age. Else, find Advisors who can control their emotions to keep them calm and ethically guide them in achieving financial freedom.