I happened to meet an old friend few days back. He was a very knowledgeable person working with a reputed MNC. We always used to discuss and debate on several regional as well as national issues. This time we happened to discuss on the topic of ‘Investments’. The moment I started talking about mutual funds as a mode of investment, he stopped me. He told me they are unsafe and in the greed of making big bucks, we might lose our capital.
I then realized that there is a lot of be done on the personal finance front. When a young knowledgeable individual doesn’t like mutual funds, no wonder why many others wouldn’t. Then, I began analyzing why people don’t like mutual funds. Here are some of the reasons which I feel are stopping people from investing their hard earned money in mutual funds.
Reason 1 – Lack of Awareness
Most of the things we know are not because we have asked for them. It’s because someone has told us or we have seen it somewhere. It’s not different when it comes to awareness regarding mutual fund investment. These days there seem to be a lot of ads, information in blogs, newspapers, etc on various aspects of personal finance including mutual funds. Despite that, people still seem to be unaware about how mutual funds work, how to choose them, etc. Unless people are clear about the above said aspects of mutual funds, they will hesitate to invest in them.
Reason 2 – Complexity of product
Mutual fund seems to be a very tough product to understand for a layman. If you directly ask him to invest in a mutual fund, he is sure to back off from it. An average investor likes to invest in products like banks deposits and insurance policies as he feels they are easy to understand. For example, he directly needs to approach his bank to obtain a deposit. If anything, he only needs to know the interest rate offered for the tenure of deposit. People believe choosing mutual funds are a headache and instead of understanding them, they skip them.
(Also read: Learn the art of picking mutual funds)
Reason 3 – No guaranteed returns
This was one of the reasons mentioned by my friend during the discussion about mutual fund investment. He asked me whether mutual funds provide guaranteed returns. My answer was NO. But then, when inflation is hovering around 10-11%, are guaranteed returns of 9% really so good? If you take the post tax returns (for 30% tax bracket), it is a dismal 6.3%. We all know that nothing is guaranteed in this world. But, when it comes to investments, we want this to change. It’s time people understand that though mutual funds do not guarantee any returns, they are vital in achieving your goals.
Reason 4 – Lost trust in markets
When you ask someone why he doesn’t like mutual funds, there are 90% chances of him telling you that he has lost trust in (stock) market. First of all, mutual funds are not only about stocks. There are other debt funds which invest in treasury bills, bonds, commercial papers, etc. and they are very safe for investment. It again boils down to the first point i.e. lack of awareness. Moreover, there are a lot of equity oriented funds which take exposure to stock markets and have done really well.
Reason 5 – Previous experience
There are also those set of people who have invested in mutual funds but have been hit hard by them. Remember the old saying ‘Once bitten twice shy’? It could also be that some of their friends have invested and faced huge losses. What could have gone wrong? They or their friends could have either picked a bad performing fund, chose the fund which did not suit their risk appetite or may not have persisted long enough with a good fund. All these happen when there is lack of knowledge. When in doubt, it’s better to consult an expert such as a financial planner.
Once you begin understanding mutual funds, I am sure you will like them more than any other products. However, it’s not that easy. You have to begin with 1-2 good funds in order to gain further confidence. Then, you need to know which funds would be needed as per your goals, risk, etc. Also, you need to review these funds from time to time. Some of the funds may be good now, but may fade away later. If you do all these things correctly, you will definitely start loving mutual fund investment.