Members of Facebook group Asan Ideas of Wealth were asked, “If the average first-time investor realised just how much risky the stock market is, and there is actually no guarantee of long term “success”, would they invest in equity mutual funds?” Their response reflects the ground-reality of the mutual fund producer, distributor and consumer in India.
This poll was conducted on Nov 18th 2019 a good three months before the stock market crashed! If it were conducted today, it would not be hard to guess how different the results would be!
Three hundred and sixty-one members participated in the poll: 284 (78.7%) voted the typical newbie investor will never buy mutual funds if they knew about the risks! At a time when the Indian market has not seen a big crash for more than ten years, it is probably the most realistic window into how mutual funds are sold and purchased (at least initially).
The simple truth is, no new investor would buy equity mutual funds if they actually appreciated that there are no guarantees of high returns and beating inflation. That long-term investing has not always worked.
No guarantees that the “India growth story” means all those who stayed invested and kept their SIPs running in the name of “discipline” would get rewarded. Most equity investing is done based on past performance (selectively choosing to see or sell high returns).
The even harsher truth is people appreciate that “mutual funds do not come with any guarantees and that past performance is not indicative of future performance” only when their portfolios are red, that is during a stock market crash.
No product can get sold without “embellishment”. This is what AMCs and their distribution partners – the bank RMs, the online portals (regular or direct), the demat providers, the individual distributors – do 24X7.
They need investors to “believe” if they do not redeem, do not stop SIPs, and hold onto their MF units and sit through this storm or the next, everything will turn out okay. Their logic is amusingly simplistic” the stock market will eventually move up. That it will, but when it wants to, not when we want it to.
Look at the lessons available for learning in under a month
- Stock markets can crash at any time, by any amount: Sensex loses 30% twice as fast as 2008 crash!
- Long term returns even from great SIP can vanish at any time: After biggest intraday fall: 10-year Nifty SIP Return is 2.3%, 14-year SIP Return is 5%
- Liquid funds can also fall
- The rate of increase in overnight mutual fund NAV can slow down significantly
- Balanced advantage funds – sold to senior citizens for regular income – can also fail during a market crash: List of equity funds that fell the most and least this market crash
It is time to wake up and smell the coffee: no newbie will buy mutual funds (equity or debt) unless a guarantee of better/bigger return is promised to them (not on paper but no one reads those anyway); a guarantee that bad times will not affect long-term returns is constantly sung to a chorus.
Distributors and AMC guys fear how investors would react to a crash, fear they would lose profits. So they become feel-good philosophers peddling “this too shall pass” Gyan.
No, I am not suggesting we avoid mutual funds. I am suggesting we invest in them (if suitable for our needs) in spite of these product manufacturers and sales guys; Ignoring them; appreciating risk well before it hits us hard; with a proper plan to reduce portfolio risk.
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