Mr. Shah is a risk-averse investor but has huge ambitions. He dreams of a luxurious lifestyle but his inhibitions of investing in mutual funds holds him back. He uses safer investments such as fixed deposits and recurring deposits to invest his surplus. Does this sound familiar?
People always find it hard to adapt to new things, be it technology, thinking, or even entertainment. This is true in case of finance and investing. Although mutual funds have several benefits, the huge ignorance among the investors is one of the biggest reasons why people stay away from these.
Investments happening over the years
Traditionally, the only form of saving or investing was done in banks, in the form of savings accounts or fixed deposits (FDs). Some investors invested in the stock markets or a select few invested in real estate. Investments in precious metals such as gold and silver were also prevalent. This was because traditionally investors did not have access to multiple investment options that could earn them higher returns.
The technical development offers a plethora of investment options today. These are available to a majority of the investors at their fingertips. However, the challenge is that they are unaware of the ease at which they can use these options. The other key factor is the ignorance about how these options work. Mutual funds and Systematic Investment Plans (SIPs) are affected by the same. Below listed are the principal reasons why people do not choose mutual funds to invest in.
- Ignorance about mutual funds
On most occasions, conventional methods of bank deposits and insurance take precedence over investing in mutual funds, simply because of lack of awareness. Not many people know about the benefits of investing in mutual funds.
- Lack of understanding
There are several mutual fund schemes available, which include equity, debt, and hybrid funds. Equity funds have higher risks but it is not as high as investing in direct equities. Debt funds may offer lower returns but these are higher than safer instruments like fixed deposits and recurring deposits. Hybrid funds invest the accumulated in equity and debt instruments giving investors the advantage of lower risks with certain return guarantee. The detail working of the various mutual funds is complicated and thus tends to discourage people from investing.
- Market volatility and returns
Investors are wary of the equity market volatility. Most people consider mutual funds to invest only in equities and assume these schemes are also exposed to market volatility. Therefore, the mutual fund returns fluctuate based on the market movements. Although this is true, investors often do not know about debt and hybrid mutual fund schemes that offer a balance between risk and returns.
Mutual funds are typically invested in a diversified portfolio of equities, debts, and bonds. This is done to mitigate the risk involved while maintaining healthy returns. This allows for lower investments risks when compared to investing directly in equities. Therefore, mutual fund returns are higher when compared to other risk-free investments like FDs and recurring deposits (RDs).
In spite of being the ideal option for small savings and big earnings as a long-term investment, mutual funds are not very popular due to the aforementioned factors. To boost investments in mutual funds, the government offers tax incentives on certain kinds of schemes. The aim of such tax benefits is to encourage the masses to invest in these funds.
Apart from this, demonetization has impacted investors’ views on traditionally safe investment avenues, such as real estate and gold. As a result, it is expected that more investors will invest in the financial markets through mutual fund investing.
The government is also improving and promoting digital India and cybersecurity in order to help strengthen a transparent financial ecosystem. The reduction in taxes for the lower and middle strata of the population is aimed at increasing their disposable income. This will encourage them to invest in the financial markets through mutual funds among others instruments.
There is no single right strategy to invest in mutual funds. The investment decision must be based on several factors such as age, risk appetite, and financial objectives. Before an individual decides to invest in mutual funds, understanding the basics and intricacies of investing are crucial. It is vital that investors comprehend the risks associated with different schemes and how market volatility affects returns.
Investing in mutual funds broadens the investment possibilities through professionally managed schemes. These are regulated by the Securities and Exchange Board of India (SEBI) and provide investors with the ability to participate in the broader markets.
Start investing today and see your money grow.