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The best lesson for mutual fund investors from the current market

Many mutual fund advisors say when faced with adversities many investors forget about their investment decisions of the past

ET Online|
Sep 20, 2019, 12.21 PM IST
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Mutual fund advisors are inundated with calls from their worried clients. Most of these clients are concerned about the negative returns from their equity investments. Apart from the usual reassurances, some resourceful advisors are using the opportunity to teach their clients an important investing lesson.

These mutual fund advisors say when faced with adversities many investors conveniently forget about their investment decisions of the past. And many investors, wilfully or otherwise, are doing the same in this crisis situation, too, they say. That is why they ask these investors to revisit their investment decision made a year or two years ago.

What do they hope to achieve from the exercise? Advisors say it will help these investors to realise their behavioural patterns and investment mistakes they tend to make in life. The self realisation would help them to avoid similar situations in life.

For example, an investor was aghast to see his small cap scheme offering -22 per cent returns. The advisor recalled the conversation he had with the clients about the perils of investing in small caps. He clearly remembered telling this client that small cap schemes are notoriously volatile. However, the investor was extremely bullish and wanted to invest a sizeable chunk of his corpus in small caps. However, the advisor managed to convince him to invest only a small part of his corpus in small cap schemes.

The investor was surprised when he heard his advisor. He had no recollection of the conversation until that time. The advisor slipped in the important lesson: most investors, including the seasoned ones like you, tend to get adventurous when the market is on a song. Never let the 'exuberance' or 'pessimism' influence you beyond a point, the advisor added.

That was about the bull-turned-mouse. How about a perpetual pessimist? Here is an investor who swore that he would never invest in stock markets again. That was in 2008 when the whole global economy was down in the dumps. His mutual fund advisor somehow managed to convince him to stay on and luckily for him the Indian market turned around quickly. Since then the investor has made 'decent double-digit returns' over 10 years, but he is back in his advisors office. He is once again resolved to quit the market. Clearly, revisiting the old episode might be instructive to this investor.

To cut the story short, revisiting our investments in times of crisis would help us to think a bit more clearly. For example, what if the investor in the first episode was a newbie who was overconfident a year ago? He would have seen clearly he was not supposed to invest in the small cap mutual fund category. Or think of an investor who got into debt when the equity was in the dumps and lost an opportunity to benefit from the revival of equity market?

Join the gang: revisit your investments and share your lesson with readers. You can share your lesson on our Facebook page.

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Stock market is on a song; what should mutual fund investors do?

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