Why Do People Lose Money After Investing In Mutual Funds?

Investing in mutual funds is not the same as stock trading – treating the two the same is one of the most common mistakes people make, leading to losses.

Stories of people losing money after investing in mutual funds make people question whether they should invest in mutual funds or whether it is too risky to do so. However, the number of instances of people who are losing money despite doing all the right things are very rare.

The most common instances of people losing money is when they treat mutual fund investments the same way they would the stock market. Many traders do short term trading on the market – watching the daily up and downs of the market and selling and buying accordingly. The same cannot be followed for mutual funds.

Let's say, based on the market movements, the amount that you have invested in the fund decreases from Rs. 1000 to Rs. 950 in value. Yes, technically, you are incurring a loss of Rs. 50. However, such a loss is called a “notional loss” because it is only on paper. When this happens, many people panic and book a redemption. They are worried that if they let the money stay in, it would incur more losses. So now that they have booked a redemption, it is no longer a loss on paper, no longer a notional loss, but an actual loss incurred on the investment.

What you should instead do is to trust the fund manager. The fund managers are also watching the market movements just like you are. As is your financial advisor. These professionals have a better understanding of not just the movements but the reasons behind the same. They are constantly studying the market, the industries, and the companies you have invested in. They will then be able to move your money around to more profitable enterprises, completely eliminating a loss and earning you a profit instead.

So do not rush into redeeming your investments. Talk to your advisors before taking key decisions and that will make sure you avoid losses and meet your financial goals!