Why mutual funds won't work for nearly 40% of investors

Summary: Why do so many investors give up on mutual funds within just two years, long before the compounding engine even switches on? A fairly recent AMFI data reveals a behavioural pattern that could explain why nearly 40 per cent of investors never see meaningful equity gains. The clues are hiding in plain sight.

Nearly four in 10 Indian investors, about 39 per cent, don't stay invested in equity for more than 24 months, according to AMFI (short for Association of Mutual Funds in India). Two years. It’s barely enough time for a sapling to take root, let alone for anyone to expect meaningful equity returns.

The recent phase of time correction highlights the short-termism among investors. Investment pauses and cancellations have climbed, with large-cap funds drawing Rs 972 crore, down sharply from September’s Rs 2,319 crore, mid-caps slipped from Rs 5,085 crore to Rs 3,807 crore, and small-caps from Rs 4,363 crore to Rs 3,476 crore.

This isn’t irrational behaviour, it’s emotional behaviour. But emotional behaviour in equity investing is a tax, and a very expensive one. And stopping SIPs or withdrawing early, in the garb of being strategic, pushes investors straight into the three biggest traps.

Trap 1: Missing the market’s most profitable moments

We recently published an analysis showing that missing just the best three months in the last three years slashed gains by more than half, especially in mid-cap and small-cap funds. The loss isn’t theoretical; it’s a clean, data-driven illustration of how markets behave.

The bulk of wealth creation does not occur gradually or evenly. It arrives in sudden bursts, often in months preceded by pessimism and volatility. This is why “timing the exit” is a fantasy. By stepping out, even with the intent of stepping back in at the supposed right time, investors dramatically increase the odds of missing the handful of months that deliver very high returns.

Trap 2: Thinking compounding is a gimmick

Compounding is powerful, yes. But it is also painfully slow in the beginning. A reader starting a Rs 10,000 monthly SIP feels this more intensely than any textbook explanation can convey.

In five years, after investing Rs 6 lakh, the portfolio under a 12 per cent return assumption is worth around Rs 8.11 lakh. After seven years, Rs 8.4 lakh becomes Rs 13.19 lakh. After 10 years, Rs 12 lakh becomes Rs 23.2 lakh. The numbers improve, sure, but they don’t feel life-changing. They feel ordinary. And that ordinariness is exactly why many investors lose faith.

But this phase is the price of admission. It’s only after investors cross this psychological mark does compounding begin to reveal itself. Between the 10th and 15th year, the same SIP grows from Rs 23.2 lakh to Rs 50.5 lakh. By the 20th year, it touches nearly Rs 1 crore from a Rs 24 lakh contribution. At the twenty-five-year mark, Rs 30 lakh becomes around Rs 1.9 crore. Stretch to 30 years, and Rs 36 lakh blossoms into Rs 3.52 crore.

Essentially, the sharp acceleration happens after the first decade, not before. Which means anyone exiting their fund investments early is bidding goodbye to compounding returns.

Trap 3: Equity is too volatile

Yes, equity can be turbulent, but only in the short and medium-term.

Short-term market behaviour, especially in mid- and small-caps, often resembles chaos. Our analysis of mid-cap funds showed that the returns in the first few years swung violently both ways.

Small-caps were even more dramatic. Our analysis of 10 years of rolling returns from the BSE 250 Smallcap TRI shows just how dramatic the one-year experience can be.

In any random 12-month period, you had a one-in-three chance of losing money. But extend the horizon and the picture transforms. Over three years, the odds shift meaningfully in your favour: negative returns fall to 11 per cent. Push that to five years and the risk all but evaporates. Losses occurred only 2 per cent of the time, while nearly two-thirds of the periods delivered more than 10 per cent annualised.

The real magic, however, appears at the seven-year mark. Across every rolling seven-year period since 2015, the small-cap index never produced negative returns, and encouragingly, nearly one in four periods delivered above 15 per cent a year.

To sum up, pulling the plug in the first two years is self-inflicting. Not because the funds are flawed or the markets are broken, but because equity as an asset class demands time, more time than most investors are currently giving it. Nearly 40 per cent of investors never reach a stage where compounding can even begin, let alone work its magic.

Do you want to build your wealth more meaningfully?

If you’ve ever paused or pulled out of your investments because the funds you hold suddenly felt “too risky”, you’re not alone and you’re not wrong either. The problem usually isn’t the market. It’s the mismatch between your risk appetite and your fund choices.

That’s exactly why you should take a closer look at Value Research Fund Advisor. It helps you understand what kind of investor you truly are, and then matches you with a portfolio that reflects that personality, not someone else’s. Instead of chasing whatever is trending, you get a curated set of funds that align with how much volatility you can actually live with.

The result? You stay invested longer, make fewer panic-driven decisions and give compounding the time it needs to work. In other words, you build wealth not by taking more risk, but by taking the right amount of risk.

So, check out Fund Advisor now

This article was originally published on November 25, 2025.