Economics Times

Are new investors investing in equity funds for wrong reasons?

With the equity markets booming, many individuals are queuing up to invest in equity mutual funds for the first time. The only trouble: they have unrealistic return expectations from their new investments, rue mutual fund advisors. These advisors say they are trying hard to make the novice investors understand the basics of investing in equity mutual funds and why it is not a great idea to focus solely on returns, especially at this juncture in the market.

“New investors who are jumping into equity funds are swayed by the media reports about the market rally. Their return expectations are out of the world and they get disappointed when you tell them to expect only 12 to 13 per cent from a scheme,” says Puneet Oberoi, a Certified Financial Planner based in Delhi.

According to mutual fund advisors, these new investors, cutting across age groups, are very clear about why they want to invest in equity schemes. Some of them are investing in the equity mutual funds because they are afraid of investing directly in stocks. Some new entrants have got into equity schemes in their search for new avenues to invest after the interest rates on fixed deposits have started falling, say mutual fund advisors.

The prime reason, however, is that they have read or seen that some mutual fund schemes have offered spectacular returns in the last one or two years. Obviously, they want to earn that kind of returns.

Puneet Oberoi says that some of these new investors are awestruck by the performance of the banking sector. “Banking sector has given around 37 per cent returns in one year, which is exceptional. But expecting similar returns in the future is foolishness.”

With their eyes firmly set on returns, these investors are overlooking even the risk associated with their investments, say advisors. For example, banking schemes are sector schemes that carries a higher risk. Sectors schemes are typically recommended to investors with a sound knowledge about the underlying sector.

Shifali Satsangee, an Independent Financial Advisor based in Agra, believes that comparing returns and opting for a scheme based on superior returns is like taking a medicine based on its taste. “If you have an investment horizon of three years, you can’t invest in a microcap fund. Even if your friend got 30 per cent returns in one year,” she says.

Mutual fund experts also believe that the new investors are taking huge risk because the market is at a risky phase now. Harish Barke, Financial Planner, Way2Wealth Advisors, asks investors to stay focussed on their goals. “Don’t run after returns, ignore the noise and stay focussed on your goals,” he says.

Shifali Satsangee believes that it is very important for these investors to understand the volatility associated with equity investments. “The new investors want to invest in the best performing scheme and expect path-breaking returns. But that is not how it works,” she says. She offers an example: an investor who had invested in dynamic bond funds in 2013 would have got 12 per cent return till now. But looking at those returns and investing now in a dynamic bond would not produce the same result,” says Shifali.