Since childhood we have heard and internalized this saying, “No risk, No gain”. We have learnt that Fixed Deposits in State Bank of India is the safest. And without doubt it is but the returns we earn does not beat inflation. So we are required to find an asset that would increase the value of our savings over the rate of inflation. And that’s where we remember the old saying about risk-gain and accept that we now have to deal with risk. And equity asset class is known to be the best to deliver inflation-beating returns.
Now, most people don’t feel confident about taking equity investment decisions. Therefore many invest in mutual funds and think they have gotten rid of the risk. Even after reading the statutory warning ‘Mutual Funds are subjected to market risk’ most investors do not comprehend what it means. Many display the nonchalance similar to cigarette smokers when they light a cigarette…until the risk materializes.
Let’s remember this when buying an equity mutual fund: You have given your money to a fund manager who is going to invest it in stocks and therefore is exposed to the same risks as you would be. Any risk he is taking is being taken on your behalf. And equity is a high risk investment and will remain so. Period. All you have done is delegated the task of risk management to a fund manager.