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Investing in mutual funds can be a rewarding venture, but it’s not without risks. We always hear “Mutual funds are subject to market risks……”. Let’s understand as to why investors lose money in mutual funds.
Understanding Pitfalls
Lack of Patience
Impatience often leads investors to make hasty decisions, especially during market downturns due to some events like wars or economic downturns.
Market Fluctuations
The unpredictable nature of financial markets can result in the temporary decline of mutual fund values. This is the time investors need to keep their emotions in control and look at the long-term story and the bigger picture.
Risk Profile Mismatch
Choosing a mutual fund scheme that doesn’t align with your risk tolerance. If the risk appetite is low then investments need to be in the schemes that are low risk. (refer to riskometer)
Poor Fund Selection
Picking a scheme based on inadequate research or incorrect assumptions can be detrimental and lead to losses.
Timing the Market
Attempting to predict market movements and making investment decisions based on short-term trends is risky.
Economic and Political Factors
External events like economic downturns or political instability can negatively impact mutual fund performance.
Management Decisions
Poor decisions by fund managers can hurt the overall performance of the fund.
Fees and Expenses
High costs associated with fund management can eat into your returns.
Lack of Diversification
Overconcentration in one sector or asset class increases vulnerability to market volatility.
Lack of Knowledge
Insufficient understanding of the functioning of capital markets and investment strategies can lead to low/poor returns.
Smart Strategies to Avoid Losses
- Stay Informed: Regularly educate yourself about market trends and fund performance.
- Start with Safe Funds: Initially invest in safer options like hybrid or debt funds.
- Avoid Panic Decisions: Stay calm during market fluctuations and refrain from making impulsive decisions.
- Mind Exit Loads: Redeem funds after a year to avoid exit loads that can impact your returns.
- Learn from Mistakes: Identify and rectify past mistakes to enhance future investment decisions.
- Performance Comparison: Evaluate a fund’s performance within its category to make informed choices.
- Diversify: Spread your investments across different schemes, sectors, and categories.
- Long-Term Perspective: Recognize that markets tend to rebound over time, emphasizing the importance of long-term investing.
By staying informed, diversified, and patient, MutualFundWala assists investors navigate the complex world of mutual funds with greater confidence and resilience against potential losses.
Also Read: How to Invest in Mutual Funds
Frequently Asked Questions (FAQs)
Can mutual funds give a negative return?
Due to the volatile market, mutual funds might give negative returns in the short term. However, in the long-term, good mutual funds do tend to give positive returns.
Can mutual funds beat inflation?
Yes, mutual funds can beat inflation. On average mutual funds schemes provide 12% returns whereas the inflation rate varies in India from 5-8%.
Can a mutual fund company go bankrupt?
Technically, mutual fund companies do not go bankrupt. In case, SEBI directs the company to shut down, funds are returned to investors on the last available NAV (Net Asset Value).
Will mutual funds go down?
The value of mutual funds may go down because it is market-linked. If the stock market does not perform well, mutual funds NAV will go down.
For further details, feel free to contact Vridhi at +9198914 67575
