These are some of the points related to mutual funds with which the investors should not keep high expectations:
- Guaranteed returns: During this bull phase, markets have this uncanny habit of lifting up the expectations of investors. It is a common sense here. If it’s a bull market, the investors are definitely on the thus profitable side of investments, let alone those who did not expect the vice-versa. This over confidence of investors in the markets sometimes leads to huge losses as they start expecting an unrealistic rate of return. For example, an investor may expect 15 per cent return this year, but he got a return of 20 per cent, 25 per cent the next year 2 years. Now if this investor expects to earn similar rates of return every year then he is doing a big mistake and will definitely be shocked to see the rate of returns dropping down to 30 per cent the following year if the market falls. This is the main problem of investors. After receiving continuous positive results the concept of rational thinking just gets vanished and one starts expecting unrealistic returns. Leave alone the bull markets, when it’s the bear market and the fund doesn’t perform well, then investors start thinking negatively and they forget the fact that it has given positive returns before. The rational decision making doesn’t come into existence and they now have negative expectations. One’s goal from investment should be getting realistic returns (linked to financial goals) and if the results are beyond one’s expectations then well and good for them.
- Safety of capital invested: It’s the hard earned money that one is investing in mutual funds. What is the capital guarantee here? One should remember; these are mutual funds. Due to fluctuating market returns and certain changes, sometimes the capital is also in negative but that doesn’t mean that the money invested is lost forever over here. In the long term, the money invested is definitely going to be earned back. A fund may require that the investor remains invested for a set number of years to help them fulfil their expected rate of returns and hand them over their principal amount as well. In this kind of scenario equity oriented funds have a high risk of capital exposure than the debt oriented ones. The debt oriented funds gives lower returns than the equity but the capital amount invested is at a safer level.
- Diversification: Diversification is the key to successful investment in mutual funds but sometimes there is over diversification; which means that investing in those funds that are highly related. This sometimes reduces the benefits of diversification and funds get exposed to a higher level of risk.
- Beats Inflation: The mutual fund is the instrument in which people invest money to beat inflation. When it comes to the matter of inflation mutual funds are prioritized among the other investment options like Fixed Deposits, Gold, Savings Accounts, etc. However, investors get disappointed when in the short run they expect debt category of this instrument to beat inflation and end up getting lower returns. Equity investments are the ones that beat inflation in the long run. Sometimes, even equity mutual funds fail to beat inflation in long run. So, one should understand that it totally depends upon fund performance which helps it in beating inflation.
These are some of the major points considered by investors while investing their money into mutual funds. Although, these are the not the main feature of this product but investing blindly on the basis of these few points can also be harmful.