Mr. Varma was an ambitious middle-aged software industry professional. He was a careful investor and risk-averse. While he was technologically savvy and dreamt big for a luxurious lifestyle, there was something that put him in the rear seat. Wondering what it could be? It was a fear of investing in mutual funds. Does this strike a chord with you? Have you heard people say, “I’ve lost money in mutual funds” and kept yourself at bay from investing in mutual funds?
Table of Contents
- Are you Avoid Mutual Funds because of Corona Crisis / Economic Crisis?
- Ignorance about Mutual Funds
- Not able to understand the Intricacies of mutual funds
- The ambiguity associated with Mutual Funds in achieving returns
- Market Volatility impacting Mutual Funds
- Poor Performance of previous funds
- What can be done to move on with mutual fund investments?
- Be aware of the returns you can get from Mutual Funds
Are you Avoid Mutual Funds because of Corona Crisis / Economic Crisis?
Now as there is a huge fall in the stock market due to the corona crisis, your portfolio would have suffered a loss.
“Nothing is permanent in this wicked world – not even our troubles” – Charlie Chaplin
Yes, If you are planning to avoid mutual funds because of the corona crisis then know this is not permanent. You would have doubts like if your portfolio will recover, will there be further loss and if you will be able to reach your financial goals.
I can guarantee you that you will be able to recover faster from the market crash.
Read through these useful tips to recover faster and better from the stock market crash.
The ways for your portfolio’s recovery is given here below:
1. You can create a coronavirus financial contingency plan
There is a proverb that says “Better a thousand times careful than once dead”.
So these are the first things to do before anything else:
- Preparing for emergencies,
- Listing your mediclaim policies,
- Ensuring family and COVID 19 coverage,
- Creating an information vault.
To know more read: coronavirus financial contingency plan.
2. Will you come out of your investments during this corona crisis?
Due to the panicking situation, you would have planned to
a) Withdraw to avoid further losses and
b) To time the market bottom.
“If you panic that’s a good way to lose. You have to stay in control”. -Ted Turner
As the quote says panicking is a way to lose, so just stay invested. If you’re in an unavoidable financial need, you can use your debt investments, emergency funds, and as the last option, you can use the EMI moratorium facility.
For more info read: How to take advantage of the coronavirus crash.
3. Steps to recover faster and better from the Stock market crash.
⭐ By a portfolio revamp
If you have poor performing funds, it is better to move them into better-performing funds before the stock market recovers. This is also called as portfolio optimization. Experiments done by portfolio revamping worked.
Should you redeem and reinvest now?
To know more read: How to revamp for faster and better results.
⭐ By a portfolio rebalance
“The difference between success and failure is not which stock you buy or which piece of real estate you buy, it’s asset allocation”. -Tony Robbins
Yes, you heard it right, after a stock market crash, the asset allocation would have changed. Then you are supposed to bring it back to the original asset allocation. This is portfolio rebalance.
For more, read: How portfolio rebalance is done.
⭐ Choosing on SIP
You can either stop, continue, or increase SIP.
“Choices are the hinges of destiny”- Edwin Markham
To know the best choice on SIP, two experiments with three investor categories were conducted, each of them chose an option. One to stop, another to continue and another to increase SIP(all during the market fall). Among these who do you think earned the highest portfolio value?
In both the experiments, it was the one who chose to increase his SIP during the market fall.
a. The one who stops his SIP incurs a loss.
b. The one who continues his SIP gains better.
c. The one who increases his SIP gains the highest.
Hence increasing your SIP will help you recover the fastest.
For more, read: How to play smart with your SIP.
If you want your portfolio to recover faster from this market crash, then do these before the market recovers.
It’s time that you re-think! If you’re avoiding mutual funds for some other reasons then Let’s analyze some of the other reasons why people distance themselves from mutual funds and how we can overcome them.
Also, watch the video here!
1. Ignorance about Mutual Funds
On most occasions, potential investors stay away from mutual funds due to the lack of awareness about the product. The conventional methods of bank deposits, insurance take precedence. Despite the advertisement and promotional campaigns by various asset management companies, the hesitation towards newer investment strategies is driven by unawareness and fear of unknown.
2. Not able to understand the Intricacies of mutual funds
A mutual fund is no child’s play. It is associated with a lot of procedures and requires thorough understanding. To suit specific needs, the market has a wide array of mutual fund schemes from which an investor can choose. Analyzing the intricacies of these mutual fund schemes before investing is a cumbersome process for a layman, who would then tend towards traditional investment options such as post office or bank savings.
3. The ambiguity associated with Mutual Funds in achieving returns
This is one of the key attributes of mutual funds that wards away people from it. History gives totally a different idea. For the past 20 years, the returns achieved through equity is (based on an average of 1 year rolling) about 11%. If you look at the same data for the past 10 years, it is approximately 17%. No fixed plan could achieve this much growth in the long term. Be assured, equities are the best option to invest as they do beat inflation in the long run.
4. Market Volatility impacting Mutual Funds
Most of the investors have inhibitions about the stock market and its oscillating tendencies. They believe that mutual funds are primarily equity-oriented funds and its returns fluctuate like the share market. They are unaware that there also exists debt-related or hybrid funds which strike a balance between return and safety.
Also, mutual fund investment involved investing in gold exchange-traded funds, fixed funds, short term debt funds and funds that balance your investment. During times of market becoming unpredictable, your best cushion could be mutual funds, if disciplined investment plans are chalked out.
5. Poor Performance of previous funds
On most occasions, investment strategies are finalized based on recommendations from family/friends. If one of them suffers a loss, potential investors feel a sense of fear and isolate themselves from mutual funds. We need to analyze the root cause of such losses to decide the best course of action. As it is often said, “investment decisions should be made from the brain rather than the heart”. A possibility of one loss doesn’t mar the probability of returns of other mutual fund schemes.
What can be done to move on with mutual fund investments?
If you want to buy any product, what do you do nowadays? Check websites and read related comparisons before deciding, right. See, marketing strategies have evolved from door-to-door marketing to social media marketing. If the companies just struck with ancient methods just because they do not understand how social media works, growth in this globalized era will be tough. Likewise, it is important to understand the intricacies of how mutual funds work and start investing in it.
1. For the first time investors, mutual funds offer short term debt funds to pilot test your investment model on mutual funds.
2. Understand the intricacies of investing in mutual funds
3. Understand the risk associated with each product and how these products would react during volatile times
4. Learn about the benefits mutual funds bring in that include but not limited to broadening possibilities, periodic liquidity, professionally managed combined instruments, ability to invest in larger projects, well regulated through SEBI.
Be aware of the returns you can get from Mutual Funds
You can use the calculator, shown below.
In this calculator, you can choose your desired options to find your estimated Mutual Fund Returns.
As goes the popular saying,“Life is not a bed of roses” and so is a mutual fund investing. There is no one right strategy to invest and depends on the risk tolerance, age and goals of the individual. The popularity of mutual funds can be seen by the number of investors opting for mutual fund schemes over several years.
I agree that the system to invest in mutual funds is a bit complex and involves paperwork, etc., Will you shy away from accepting a good-paying job just because they ask you to complete formalities like filling up forms, undergoing a medical examination or an interview? You do follow these things and then only get into a job, right. In the same way, by spending quality time with the investment advisor to understand how mutual funds work will help gain a huge from your investments.
To realize the superior goals of our life, we need to create a complete and comprehensive financial plan which covers everything from goal setting to execution towards goal achieving. To create a sound financial plan, I strongly recommend you to take advantage of