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 of 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:
- 1. You can create a financial contingency plan
- 2. Will you come out of your investments during this market crash/correction?
- 3. Steps to recover faster and better from the Stock market crash.
- 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 mutual fund investments
Are you Avoiding Mutual Funds because of a Recent Market Correction / Crash?
If there is a huge fall in the stock market, 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 recent market crash or correction then know this is not permanent. You would have doubts like if your portfolio will recover, whether will there be further losses 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 are given here below:
1. You can create a 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.
2. Will you come out of your investments during this market crash / correction?
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 and emergency funds.
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 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 rebalances 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 for SIP, two experiments with three investor categories were conducted, and 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 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.
Top 5 Reasons Why People Avoid Investing in Mutual Funds
1. Ignorance about Mutual Funds
Chances are that most of your money resides in a savings account. Bank deposits are generally safe, but have not been known to offer strong potential for growth.
Post-tax and inflation, the money you work very hard for fails to do the same for you. But there’s a way to make your money earn enough to beat inflation and earn you worthwhile returns – diversification.
And, the simplest way to diversify your investments is to begin investing in mutual funds.
On most occasions, potential investors stay away from mutual funds due to the lack of awareness about the product. In the conventional methods of bank deposits, insurance takes 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-income 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.
Both risk and returns are high but equity funds could be a good investment if you have a long-term perspective and can stay invested for at least five years
Expected Equity Mutual Fund Returns:
When the economy grows at 8% or 9%, the nominal rate of growth would be 15% (assuming 6% inflation). When the broader economy itself grows at 15%, good businesses that are listed in stock markets would grow at a much better rate.
This is the kind of return that is possible in equity mutual funds.
We can only work on our approach and attitude towards investing but can never control the markets. This need not disappoint you as prices tend to mirror the value in the long run.
Markets can test our patience, conviction and judgment to the hilt. But the reward is worth developing these traits.
The habit of investing regularly and for long term is capable of rewarding us extremely well.
Risk is Everywhere!
For any asset class, equity or debt or real estate, the time horizon of investment is extremely important for achieving the possible returns. If there is mismatch between the time horizon and the nature of asset; then it would be classic case of ‘sour grapes’.
There is a risk in every investment – equities, real estate, gold and debt.
Even safe investments carry the risk of erosion of capital due to inflation and taxes. Someone who is very rich can take this risk as even after the above erosion; the life style and financial goals can be met. Rest of us need to understand and take measured risks. The risk can be managed well if we stick to the time horizon for the investments chosen. Can risk be totally avoided? The answer is no. It can only be understood and managed.
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-income funds, short-term debt funds, and funds that balance your investment.
You can choose different mutual fund options based on your different requirements. You can assess your mutual fund investment requirement based on the below steps:
- Define your investment objective – pinpoint exactly what you are investing for.
- Define how long you can stay invested – if you need your money back in the short term, an equity fund is probably inappropriate as equity funds offer the best potential for returns over the long term.
- Define your risk tolerance and thereafter select a fund type that best meets your need.
During times of market becoming unpredictable, your best cushion could be mutual funds, if disciplined investment plans are chalked out.
Stock Market Cycle Vs Investor Emotional Cycle
It is very easy to have conviction in good times and when results are immediate. To get good results, one needs to understand the nature of the investment and its tenure. Any mismatch in this is a sure recipe for disappointment.
In markets, patience, conviction, and courage are supreme virtues over knowledge. All information is not knowledge and all knowledge is not wisdom.
So, when you invest in an equity mutual fund with a 10-year outlook, don’t keep looking at the monthly statement. Or rather look at the statement without emotionally reacting to the same. There is no point in measuring the short-term performance of a long-term investment. Neither the exaggerated return of the bull market nor the poor return of the bear market is an indicator of long-term return.
If you ask me, the key to investing is discipline and patience.
People earn very poorly from markets because of the emotional cycle of investing; buying at market highs and selling at market lows. This is because when markets are high, our confidence level is high and when markets are low, our fear is high.
Investing regularly and for the long term acts as a hedge against this emotional cycle.
5. Poor Performance of previous mutual fund investments
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 prevent 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 companies are 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 them.
1. For 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 are not limited to broadening possibilities, periodic liquidity, professionally managed combined instruments, the 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 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 in 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, 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 achievement. To create a sound financial plan, I strongly recommend you take advantage of