Differing from the most popular opinion these days, there are lots of reasons why you should not invest in equity mutual funds.
Moreover, the cause can invest in an inappropriate source of income, maybe your prospects are not too associated.
There are lots of articles, explaining why you should invest in equity mutual funds, but nobody talks about the dark side of equity mutual funds.
Here are some important reasons why you should not invest in equity:
Capital Protection
Your capital is not that protected in equity mutual funds. At any given time in equity, your valuation can be below the initial capital invested. Therefore, there is no guarantee of capital protection, un, like other fixed saving instruments. This is all because equity MFs are subject to market risks. However, if you’re someone who desires that their capital should be protected at all times, notwithstanding lower returns than equity MFs are not for you.
2-3 Years of Investment
Equity MFs are not 2-3 years of investment. You need at least 5 years of investment, even more for more aggressive and volatile schemes. For some schemes, you won't even have a longer time horizon than 5 years because the fund can be tremendously unstable and therefore needs to go through various cycles before it stabilises. Therefore, if you’re not certain you can stick for a long time and need the money before 5 years then it’s better to stay away from equity MFs.
Fixed Returns
As mentioned earlier, Equity MFs investments are subject to market risks. The share market can be extremely volatile in the short run. Consequently, the returns equity is also not fixed. In equity MFs, your returns are dependent on the market movement as well as the performance of your scheme. If you’re someone who likes to know beforehand your total returns or prefers fixed returns then equity funds are not for you.
Avoid Equity As it is Risky
Just when you think you can make an entry in the wonderland of investment, you get hit by the disclaimer that ‘Mutual funds are subject to market risks.’
We know that there is a risk in investing in the stock market. In India, most people are away from the stock market and even MFs.
Investing in equity is a risky proposition. An investor needs to take well well-calculated, not blind risk risks and should know how to invest as well as investment principles and techniques.
At the same time staying away from equity is also a risky proposition, because inflation is like poison, which will eat the value of money over some time. That is if inflation is 10%, your investment should give at least a 10% post-tax return to maintain the same monetary value for your investment. Equity is an investment option that has the potential to beat inflation in the long term.
For instance, there were two classmates, Rahul and Kunal. They both had the same level of knowledge when they completed their graduation. Rahul hates to take risks. But Kunal is always ready to take the risk. After 15 years of their graduation, they connected on social media only to know that they both are working for the same enterprise. Rahul was working as an account executive in the Delhi branch and Kunal was working as a director-finance in the Mumbai branch, the headquarters of the company.
So, what made this huge difference? The willingness and ability to take the risk. Likewise, an investor should not hesitate to take the risk. The ability & willingness to take the risk by investing in equity will possibly increase your wealth significantly.
One thing you must keep in mind is that every investment has risks, you cannot avoid any investment plan just because it's too risky. Likewise, don’t hesitate to invest in equity just because it's risky. Beat inflation and accrue real wealth.