Should investors with very long term horizon always pick small cap mutual funds?
Mutual fund investors assume that their risk taking ability goes up if they have really long investment horizon.
I am investing for my retirement. Since I have a lot of time I will invest in small cap mutual funds.
Most queries on our official Facebook page have similar lines. Is it a must to invest in small cap schemes, one of the riskiest equity mutual fund category, when you are investing for a very long financial goal? Why do people assume that their risk taking ability goes up if they have really long investment horizon?
According to most investment experts, this is a false assumption many investors make. Some of them say it could be actually an excuse made by many investors to justify their investments in small cap schemes. Not for others, just to pacify themselves. However, the justification need not help them to hold their nerves during an extremely volatiles phase in the market, say experts.
Yes, it is true that you may be able to recoup most of your losses if you say invested for a long time in equity mutual fund schemes. It is also true that riskiest equity mutual fund categories have the potential to offer the highest returns over a long period. But would you be able to carry on with your investments with these facts in mind when there is a bloodbath in the stock market. Would you be okay if your investments lose 60 per cent of its value?
Mutual fund advisors say every investor has a risk tolerance level. It is her nature or mental make up. It need not be really her risk-taking ability. It is the risk she would be okay with. If it goes beyond the tolerance point, the investor might panic and would not able able to continue with her investments. Not convinced?
Consider this example. Person X is a crorepati. But she won’t invest in equity mutual funds because of fear of volatility and losing money. Surprised? Yes, the person has the capacity to take risk, but don’t want to take it. The person also gets extremely nervous about volatility in the stock market. Don’t be surprised. There are many such wealthy investors who would never invest in equity mutual funds.
The point is: it is not necessary to chose riskiest investment options just because you have a very long investment horizon. Choose an option you are comfortable with and would be comfortable continue with even during bad phases in the market. It is not necessary to torture yourself for extra returns. You shouldn’t lose your sleep because of your investments. You should be able to carry on with your life smoothly irrespective of the ups and downs in the market. That is possible only if you choose your mutual funds strictly in line with your risk profile.