Continued outflow from equity MFs: Investors must stick to financial goals

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The recent news that equity mutual funds have witnessed outflows for the eight-straight month in February this year is worrying and raises a few important issues relating to investing.

As is being said by experts, the continued overall outflow from equity funds could be because of various reasons. The swift move upwards that the market has witnesses post the Covid-19 shock in 2020 could be unnerving investors.

Indian stock indices have been hitting new highs in recent times and reaching levels that were unimaginable a few months ago. Investors are trying to capitalise on it and booking profits on their portfolio gains.

It could also be the fear that high valuation of stocks is a bubble that could burst anytime leading to a market slide. Some experts feel that the rather muted performance of mutual funds over the past few years may have resulted in disillusionment among investors who are now taking to investing directly in stocks instead of choosing to go for the mutual fund route.

If these are the causes for which investors are pulling out of equity mutual funds, it goes against the basic grain of equity investing. For starters, equity investors, who opt for direct exposure or through mutual funds, must invest with full knowledge that it is a risky exercise with an inherent potential of losses. However, on the flip side, the chances of latching on to good stocks or funds that help in generating huge wealth is also inbuilt into equity investing.

However, for creating wealth in the long term one needs to remain in the market for long. As has been said many times, it is one of the cardinal mistakes to try to time the market or to gauge its highs and lows and make investment decision accordingly.

For example, if one had sold when the BSE Sensex had touched highs of 41,000 plus in February 2020, would have been happy when the market collapsed subsequently.

In equity investing, you have to brave it out through the market cycles to eventually create wealth. Given the current strength in the market, there is every possibility that the indices will make new highs from here on and investors who remain invested will gain. The caveat however remains that there is no certainty in market mood.

The other issue is about investing directly in stocks as against adopting the MF route. If you have the requisite knowledge and the time to study the market, direct stock investing could be good for you. However, if you are not clued on to markets, there is every possibility you will burn your fingers. By investing in mutual funds, you hand over your money to trained professionals.

Mutual funds may be slow and grinding but your money is in safer hands than trying it yourself. In this context, a recent article by leading brokerage house Zerodha has mentioned that less than 1% of those who indulge in active trading are able to beat returns offered by fixed deposits in the long run.

Moreover, mutual funds create a diversified portfolio out of the corpus they collect from investors, which include a variety stocks from different sectors. Hence, while the rise in NAV may appears to be slow and muted, when markets move downhill, the downside is also protected.

A stock portfolio created on your own may have concentration risk which can be extremely dangerous.

Investors must realise that the market slide from March 2020 was totally unforeseen. Covid-19 came as a ‘Black Swan’ event which halted the run that the stock market was witnessing. And how swiftly the market shrugged it off!

It may be that many who are pulling out their funds may be in genuine need of money with the pandemic playing havoc with jobs and livelihoods. However, it is always better to invest with a long term view and with your financial goals in mind, whether it is equity or debt investing. Short term market movements should not determine your investing strategy. Otherwise, you might end up being short of cash to fund your future goals.