Mutual Fund Investors Do Not Understand These 3 Critical Points For Long Term Success

Are you investing in equity mutual funds or planning to invest?


While you might have done your research and reading about investing in mutual fund, but I am sure you still do not have 100% clear idea about what does it mean to invest in a mutual fund. In this article my attempt is to make you understand what exactly you should be expecting out of your investments in equity mutual funds.

A lot of investors are approached by advisors and agents who sell equity mutual funds to them in the name of “high returns”. But investors are not informed about the risks associated with it. Because of this most of the investors redeem their investments if markets fall or if the returns are not that great after a year or so and hence lose out on getting the benefits of mutual funds over a long term.

This happens because in investors mind a mutual fund is all about “getting high returns”.

So it’s very important to clear all the wrong notions about equity mutual funds and set a clear understanding about them in your mind so that you get the best out of your mutual funds investments.

3 important points to know before you invest in equity mutual funds

So in this article, I am listing various important points you should know if you are investing in an equity mutual funds or planning to do same.

1 – You are investing in a diversified businesses

Investing in an equity mutual fund is not like putting money in a fixed deposit or real estate. When you invest in an equity mutual fund, it invests your money in a portfolio of companies.

Equity Mutual funds are a way to invest in a number of stocks using one single investment and get it managed by an experienced and well qualified fund manager.

For example, Birla Sun life Frontline Equity had 80 stocks in its portfolio as on 30th Dec 2016, as per money control website. Which means that if you are investing in this mutual funds, you are actually investing in 80 companies.

2 – You are investing for long term

No business earns exceptional returns over a short term. Now as you know that you are actually investing in a business when you are investing in a equity mutual funds, that too in multiple companies, the great returns will come over a long term.

Some companies will not do great, some of them will do average and some of them will grow exceptionally. And when you do the average, you will get very good returns.

The best part is that the chances of great returns are much higher because you are diversified across various sectors, companies, management and size.

3 – You are going to face volatility

“Mutual Funds investments are subject to market risk, please read the offer document carefully before investing”

You will hear this line often in the mutual funds advertisements on TV. A lot of first time investors who do not understand equity investments think that “Market Risk” here means that their money is at risk and they can lose all their money by investing in stock market or mutual funds.

Mutual Funds are Volatile

That might be true with one particular low quality stock. But with mutual funds, it’s far from truth. Dozens of quality stocks portfolio which is monitored regularly can bring in some ups and downs in short term, but your money will not be lost at all.

All you can expect is VOLATILITY with your mutual funds investments. Your investments value can go up one day and then down one day, and then again down another day and again down 2nd day and then boooom… UP on the third day and then again down and again up and up and up.

But you need to understand a very important thing. Volatility is an inherent part of mutual funds investments as it’s invests in stocks, but it’s more of a short term phenomena. You need to sit tight and look at the long term trend and how it moves.

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