Explained! Why we lose money in Mutual Fund

We have always considered mutual funds to be the safest bet in investment gamble, but Kaushlendra Singh Sengar  says every venture has its own shortcomings, and we need to know them

“I wish to invest in mutual fund, as my first investment,” my friend told me. My immediate question to him was, why? And he replied, “It’s secure and safe and my money will be managed by professionals, and I don’t have to worry much.”

Was he really right? Do we never lose money in mutual funds? Is it 100% fool proof investment available in the critical financial world? If it was really that great as an investment vehicle, wouldn’t everyone put their hard-earned cash in mutual funds rather than putting it in saving account or fixed deposit?

But looking at the benefits of mutual funds – it being professionally managed, benefits of diversification which ultimately minimizes risk coupled with requirement of low amount to invest along with tax advantage – it looks like a favourable investment option for every class of investors.

Despite such fascinating edges which mutual fund has over other investments, investors may tend to lose money even in them. But the question arises why? How? When a fund is being managed by the best financial minds of the markets, who keep a track of every nitty grittiest of the stock, coupled with functional advantages of the fund, then how do we lose our money?

Thorns of money tree

If we come across any individual who has lost money in mutual fund, he seldom looks back at the reason; rather he will close that door of investment opportunity for him. So, we are still at very nascent phase of investment industry. If we lose, we don’t look back and question why, we rather shy away our eyes from that option and forget about it. This is why we make mistakes. So, before investing into anything, we must know all the pros and cons of the investment options. We all are generally aware of the fruits of the investment tree but not the thorns. Let’s know the thorns of mutual fund, which makes us, lose our hard-earned moolah.

Return expectation, time horizon, individual goal are the first steps before you put your money into anything. Here lies the trap; we don’t know our purpose and duration of investment, which makes the basis of our investment. Investment goal needs to be sorted at first instance. So, when we don’t know what we need, we end up choosing the wrong product, thus ending up in wrong box. If one doesn’t have any minimum time frame, and just wish to save, the duration should be in line with the product. Basic rule which need to be followed is five years and three years for equity and income fund, respectively.

Home done well

One of the biggest challenges is to pick out of numerous numbers of mutual funds in the market. There are around 40-45 major mutual funds operating in the market with total schemes of 10,689, with total asset under management as on June 2017, at almost Rs 19,51,492.21 crore. This makes further choosing the right mutual fund a difficult task for retail investors.

Many investors put their money in mutual fund because despite being unaware of how the stock market operates, they may wish to encash on the opportunity. They think mutual fund is a lesser risky option. But we must understand where is ultimately a mutual fund manager is investing? He doesn’t put the investor’s money in fixed deposit or recurring or may be a saving account which gives us a guaranteed return. A mutual fund manager ultimately puts his money into the stock market. Every individual knows that stock market is prone to all kind of risks – be it economical, political or global. In recent months, return on mutual funds like Reliance midcap and small cap fund (G), L&T emerging business fund and many others has given negative return. Mutual fund is also prone to various risks which the stocks are prone to, in which the fund managers have vested their funds.

We invest after looking at the past performance, but past performance doesn’t guarantee any future income. A mutual fund manager is driving a car without a reverse gear, that is, he can only buy shares and not short sell, and neither can he exit the market. This is one major flaw, even at the weakling, manager has to buy. And only an investor can ask him to exit from a particular share, this is where investor fails to make proper exit from the market and that pull his investments down.

Fund managers have inflow of fund; they can’t keep the money within the house. So even if the markets conditions are unfavourable, a manager has to put in money in some or other stock, thus making a bad investment decision.

Though mutual fund is lucrative, it has its own flaws which tend to pull down the returns. So, an investor must read the document carefully before investing.

(Kaushlendra Singh Sengar is the Founder & CEO of Advisorymandi.com)

(To receive our E-paper on whatsapp daily, please click here. We permit sharing of the paper's PDF on WhatsApp and other social media platforms.)

Free Press Journal