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, specifically with equity mutual funds.
- 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:Gambling has no risk mitigation strategy, whereas with MFs, your money is invested in diverse industries. Hence, if one industry performs poorly, you still have the 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 without any option for recovery. But if mutual funds perform poorly, you can rebalance by withdrawing your units and reinvesting in other successful funds and recover your money.
- Information is key:In a casino, you always have to go with your gut feeling with no prior information about the players at the table. But when you invest in mutual funds, a lot of information is 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 compares the two, you have at least 5 reasons not to believe them.