Most of the people who are planning to invest or have just started to invest avoid investing in mutual fund. A mutual fund is a company that pools money from various investors and invests the money in stocks, bonds, short-term money-market instruments and assets depending on the risk taking capacity of investor.
Before investing, one has to keep in mind that each investment carry certain degree of risk which cannot be avoided as those are external factors.
Here are basic reasons why people avoid investing in mutual funds
1) Illiteracy or Unfamiliarity
Prospective investors stay away due to less awareness on the subject and most they are happy with the conventional and conservative methods of bank deposits, insurance.
2) Complexity Involved with Procedure
People may find investing in Mutual Funds a cumbersome process as it takes lot of documents to go through. A layman may find it difficult to understand the process of various types of mutual fund investment which is based on the return and risk factor.
3) Market Impact on Mutual Funds
The famous quote which you keep hearing "Mutual fund investments are subject to market risks ... " yes, it is very true. Markets have great impact on mutual funds. The main reason here is not knowing what underlying securities your mutual fund owns. People are less aware that mutual fund also invest in debt instrument where it has nothing to do with market volatility.
4) Performance of Funds
Mostly people with less knowledge do is seek advise from friends and family. If any fund performs poorly they fear downside risk and withdraw themselves. Before investing one needs to understand the concept and reasons for downtrend rather than withdrawing.