Why do investors pick wrong mutual fund schemes? Answer might surprise you

Why do investors pick wrong mutual fund schemes? Answer might surprise you


Blame it on the volatile market. There is deluge of messages on etmutualfunds.com official Facebook page these days. Many readers want to know whether they have picked the right mutual fund schemes for their retirement, child’s higher education, downpayment for their homes, and so on. Most often we end up asking for important detail that is missing from most questions: the risk profile of the investor.

When we ask some readers about their risk profile or risk appetite, we get some very odd responses. One, typical response: “oh, I have a very long investment horizon. I can be very aggressive.” Another response: “I am willing to take a lot of risk if I can get a lot of returns.” Some investors are candid: “Oh, I don’t know about that, but I chose these schemes because they are offering higher returns.”

As you can see, these investors are clear about their reasons for choosing their investments, but somehow they harbour doubts about their strategy. Well, you need not do that. All you need to do is to find out your risk profile and choose mutual fund schemes that are in line with your risk appetite. It is that simple.

Think of it: what are the important factors to keep in mind while choosing a mutual funds? Your goals, investment horizon and risk profile, right? Since we are discussing about equity mutual fund schemes here, we assume that you have a long-term financial goal. Also, a longer investment horizon. The only factor that we are not sure about is the risk profile of the investor.

Aren’t equity mutual fund investors supposed to have a higher risk appetite? Yes, you should invest in equity mutual fund schemes only if you have a high risk appetite and ability to tolerate volatility in the stock market. Even with a higher risk appetite, some investors want to play it safe. They would call themselves conservative equity investors who want to grow their investment without much volatility. Some are ready to take very high risk because they can afford to take the extra risk. However, some others want to take the middle path or moderate risk.

This is the reason why mutual fund houses have different categories of equity mutual funds. For example, conservative equity mutual fund investors are typically asked to invest in aggressive hybrid funds or large cap mutual funds. Multi cap mutual funds are recommended to investors with moderate risk profile. Aggressive investors are always in love with mid cap and small cap mutual fund schemes.

Now, what happens when a conservative investor chooses a small cap mutual fund scheme? Typically, the investor tends to panic when the schemes gives negative returns for a year or two. They either stop their investment or sell their investments. Similarly, an aggressive investor tend to get impatient when he sees his investment in a large cap scheme is growing at a snail pace. She would lose patience and wonder whether it makes senses to go through the hassle of investing in a mutual fund schemes to earn one or two per cent extra returns.

That is why it is extremely important to include your risk appetite in the picture while selecting equity mutual funds to achieve your long-term goals.