Very often, I come across peers and friends who believe that investing in mutual funds is similar to gambling at a casino or betting over a sports match.
The reason for this belief is the only thing common between these two - risk. While it is easy to see the risk in gambling, the perception of risk in MFs is created because of their association with stocks, in the case of equity mutual funds.
It is common to then think of investing in mutual funds as risky business. But there are some fundamental differences between investing in mutual funds and gambling in terms of how much of a risk they are.
Time Sensitive:A hand played at a roulette table, or a sports match lasts only as long as the event. You do not have any scope of recovering the money you lost during or after the same event. Investing, on the other is a long term process and you have a good chance of a profit over your initial investment over the years.
Diversification:When you take to gambling, no such risk-mitigating strategy is applied. However, investing in mutual funds helps you with the diversification of your money. Your money is invested in diverse industries and companies, which means, that if one industry performs poorly, you still have others to make up for it, to achieve the promised returns.
Recovery:If you lose money with an unlucky hand at gambling, you lose all of it at one go, and there’s no recovery. But if mutual funds perform poorly, you can rebalance by withdrawing your units and reinvesting in other successful funds, and recover your funds.
Information is key:While sitting at a casino table, you always have to go with your gut feeling, no prior information about the players at the table is available. But when you invest in mutual funds, there is a lot of information available about the funds, such as the composition of the funds, industries invested in, etc.
The potential for growth:Even a small amount invested in equity today, can make you very rich, 10 years from now, that too with a fair degree of predictability. This kind of potential for growth or predictability does not exist if you gamble at a casino.
These are just some of the many reasons why investing in mutual funds is nothing like gambling. So next time someone tells you that, you have at least 5 reasons not to believe them.