Investing in equity funds has been a painful experience for many participants in the financial marketAs we have seen over the last few years, the damage done to investors is deep and multifaceted, and it may take a considerable amount of time for the psychological scars to heal.

To illustrate the severity of the situation, let's dive into the statisticsFrom the beginning of 2021 until September 20 of the same year, a total of 507 regular equity funds reported only 37 positive returns for investors, which translates to a mere 7.3% success rateThe average return for these funds was a staggering -31.96%, and the median return was even worse at -35.37%. Similarly, among 1,468 hybrid equity funds, only 48 managed to report positive outcomes, yielding an abysmal average return of -36.51%, with a median return of -38.72%. Even in the 1,865 flexible allocation funds, only 350 saw profits, which was less than 20% of the totalThis group recorded an average return of -22.85% and a median return of -25.76%.

Investors are generally aware that equity funds come with high risks and can experience significant volatility in the short termHowever, the prolonged duration of losses has likely pushed many investors to their breaking pointFrustrated with their investments, it is not uncommon for retail investors to redeem their funds at the slightest hint of recovery, thus contributing to a downward spiral in the market.

One major contributing factor to the poor performance of equity funds is the industry’s overemphasis on short-term gainsIn an effort to scale quickly, fund companies often prioritize short-term performance over risk managementThis can lead to excessive concentration in specific stocks or sectors that seem promising at the moment, such as the once-booming industries of alcohol, renewable energy, pharmaceuticals, and semiconductors.

When these sectors perform well, fund managers become rock stars, attracting substantial investment into their new offerings

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However, the reality is that when market conditions shift—if those sectors begin to falter— fund managers find themselves in a predicamentThe concentrated positions that previously drove large returns make it difficult to adjust or liquidate holdings if the market turns sour, forcing fund managers to watch their net values plummet day by day.

As the financial market matures, it is increasingly imperative for fund companies to account for investors' experiencesThey must find ways to lower investment risks and minimize fluctuations in net values, delivering tangible returns for their clientsDespite the dismal performance of equity funds over the past few years, it remains essential for investors to maintain a certain allocation in equity funds.

Let me illustrate this with a hypothetical exampleConsider an individual with 1 million yuan that was placed in a bank five years ago, where the highest interest rate possible was around 4.18%. This amount would yield approximately 41,800 yuan in annual interestFast forward to today, and that interest rate has dropped to 2.4%, generating only 24,000 yuan in interest per annum—over a 40% declineTo achieve the same interest income, the principal would need to increase to around 1.74 million yuanIn the absence of such a principal increase, the only path left is through investment in higher-risk assets capable of providing greater yields.

This year, the rapidly rising bond prices, driven by declining market interest rates, have largely attracted savings away from traditional bank accountsThis trend has led to a noticeable increase in the scale of bank wealth management products and pure bond fundsHowever, this yield model that relies on rising bond prices is unsustainableOnce bond prices stop appreciating, the returns from these fixed-income products could see a drastic reduction.

As returns from pure bond funds and bank wealth management products decline, maintaining reasonable returns becomes increasingly challenging

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