Most of the investors begin investing using Mutual funds.
I am surprised when many people come to me and ask my advise for investing in Mutual Funds rather than equities because they perceive investing in Equity oriented Mutual Funds to be much safer than investing in equities directly. If you think so, Think again!!
This is an incorrect understanding.
Equity oriented Mutual Funds are as good (or as bad) as the investments made by the Mutual Fund Manager, the underlying assets which the fund manager invests etc.
The risks and returns are linked to the funds holdings (In case of Equity oriented mutual funds, it is the underlying stocks, their performance and the overall performance of the stock markets). The returns and risks are also linked to the the ability of the fund managers performance in trying to time the entry and exit and generating the ‘ALPHA’ returns . [[ From Investopedia — Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return.]]
If the Stock Market tanks or crashes, the mutual funds NAV also comes crashing down. Near term performance of Mutual Funds is virtually linked to the vagaries of the market movements. Long term performance depends on the fund’s objectives, fund manager’s performance etc.
So, please understand that if you wish to invest in mutual funds….. go ahead. But please remove the perception that they are less risky than investing in stocks directly.
If one is a saver kind of investor, a Systematic Investment Plan (SIP) in either A-Category stocks or Mutual Funds will meet the returns expectations over long periods of time. In fact considering the annual expenses of the Mutual Funds involved, investing in stocks and holding over long period of times might even beat the returns of the Mutual Funds handsomely.
Whether picking stocks or Mutual Funds , you need to stay up to date on the sector or the stock in order to understand the underlying investment fundamentals. You do not want to see your investments go down the drain as time passes.