You love investing in equity mutual funds. Your money grows really fast. Even before you realize, you are a rich man. But there’s a small problem. Investing in mutual funds can be very risky. You can lose a lot of money….so much money, that you will never want to look in the direction of mutual funds ever…. Why did this happen? Perhaps you ignored the disclaimer written in bold letters, “An investment in mutual funds is subject to market risk, please read the offer document carefully before investing.“
You just want to go back to your beloved fixed deposit. Your beloved fixed deposit doesn’t give a high return? So What….At least your money is safe and you earn interest on it. Why did this happen? You invested money in mutual funds, without understanding how they worked. Remember this saying, “Risk comes from not knowing what you are doing.” Your investment in equity mutual funds is now a risky investment, just because you have not done your homework…sorry research…before investing in mutual funds.
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Never invest in equity mutual funds, unless you have time to dedicate to this investment. If you do not give sufficient time to your mutual funds, you could set a wrong time horizon for your investment. Do not understand what this means? I’ll explain. When you invest in an equity mutual fund, you need to stay invested for at least 3-4 years called the time horizon, to give yourself the best chance to make a profit.
Equity mutual funds generally give good returns, only if you stay invested for 3 years or more (Stay invested for the long term). If you don’t have time to invest in equity mutual funds, you will not be prepared to stay invested for 3 years. Say the stock markets crashes (a very natural process as stock markets are volatile), a year after this investment, you will panic, exit the mutual fund and suffer a heavy loss.
Never invest in an equity mutual fund, unless you understand the difference between a trader and an investor. Traders are in the stock market for short term gains. Traders can invest for the short term if they are disciplined, hard working and have working knowledge of the stock market. You are an investor not a trader. You need to stay invested in the equity mutual fund for the long term.
To behave as an investor and not a trader, set a financial goal. The financial goal could be something like this. Invest in an equity mutual fund to buy a car, three years from now. The financial goal forces you to stay invested in the equity mutual fund for at least 3 years. You are very likely to make a profit on your equity mutual fund and yes…Get that Car.
You have invested in equity mutual funds. If I ask you how much return you want from this investment, you will say 20% in a year. What if you get 12% after a year from your investment in the equity mutual fund? You will be very disappointed. You will say, I invested in this equity mutual fund to get 20% returns. I got just 12%. I don’t want to touch equity mutual funds again.
Let me ask you a question. Which investment can give returns more than 12% a year? You get 7-8% a year from your investment in fixed deposits, after tax perhaps less. If you are very happy with this return, why not 12% a year from the equity mutual fund?
Yes, an investment in equity mutual funds can be very profitable, only if you understand and accept risk. You get very high returns, but at high risk. Make sure to understand risk and avoid losing your hard earned money, when you invest in an equity mutual fund. Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.