Is mutual funds safe? this question was coming again and again in her mind. Kalpana 35, wanted to invest for her son Aarav 3 years, so to ensure his good future. She had heard a lot about mutual funds from her friends and media. She was anxious before investing in mutual funds, since she was a novice for mf investments.
She wanted to invest in the mutual funds for her son’s education and other requirements.
She had heard that Mutual Funds are subject to market risk and invest your money carefully after reading all the documents. Because of all these warnings she had doubts about mutual funds.
Let’s understand the risks and how to manage risk in mutual funds.
Table of Contents
What is Mutual Fund?
A Mutual Fund scheme, pool money from investors and invest the Corpus in a variety of asset classes such as equity, debt( fixed income) and money market instruments to generate good returns. However, returns are never guaranteed in mutual funds.
Is Mutual Funds safe?
There can be many aspects in terms of safety for mutual funds investment, in Kalpana’s mind. Let’s discuss on various aspects about the mutual fund safety:
Are Mutual Fund Safe ( in terms of capital protection)
All investments have some in built risk factor associated with it, be it interest rate risk, credit risk or other.
Mutual Fund companies do not guarantee for invested money or the returns. But they follow the best practices and ensure good returns.
Explanation: All mutual fund companies work under the regulations laid by SEBI. These companies are law abiding firms which handle your money as an fiduciary.
It has never seen that your investment in mutual funds turn to zero. In a downside market the money value may get negative for the time being but never a zero.
For instance let’s assume Kalpana invested Rs 1 lac and after 1 year the market goes down, than might be her money value may remain 80/90 or 60 K, depend on situations. But it never happens that 1 lac become ZERO.
WHY?
This is because a single mutual fund scheme invest in many stocks or bonds ( usually more than 50 ). You know in any situation, all company stock will not turn zero at a single point in time. Additionally a mf scheme invest money in different sector stocks, adequate diversification in terms of industries.
Are Mutual Fund Safe (in terms of fixed return)
Mutual Funds are subject to market risk as they invest their money in stocks, fixed income instruments and other securities.
Interest rate, the market, and other economic parameters keep on changing each day. Thus mutual fund never give a steady and fixed return.
Are Mutual Fund Safe (In terms of Security risk associated with AMC)
There is no need to worry about the company’s credibility as all the Asset Management Companies work under the strict regulations of SEBI.
They cannot take/use your money for their personal benefit nor they can shut down like Chit funds and run away.
Are Mutual Fund Safe ( In terms of Frauds)
As mutual funds governed under the strict regulations of SEBI, therefore there is a negligible risk of fraud.
You can estimate the level of security by the statement that money can be transmitted from your bank account to the fund’s account and from the fund’s account to your account ONLY.
Should you invest in Mutual Funds?
Of course, you should.
Although mutual funds do not give fixed returns or capital protection but they surely give better returns as compared to other investment avenues.
Mutual Funds give higher inflation-adjusted returns. Therefore to make money you should invest in mutual funds as per needs.
Are Mutual Funds Safe for long term?
Ok, Can I ask you a question?
Do you drive a car? Or do you cook food at home or restaurant?
Do you use electricity in your office, shop or home?
I know,
Your answer will be like ‘Yes I do’, but I follow the good practices to ensure safety.
Exactly, the same way Mutual Funds are. Mutual fund investment for long term investment give you good inflation adjusted returns provided one follow Investment Planning.
Additional Reading:https://bestinvestindia.com/mutual-fund-guide/
You have to adopt the right strategies with mutual funds too.
Top Tips to consider before investing in mutual funds
Decide your investment time duration
- Decide your investment time duration and choose your funds wisely as per your duration. Because different mutual fund schemes are suitable for different time duration.
- Risk-Taking Ability: Risk-taking ability depends on many factors such as your age, your financial condition, your market understanding and your asset allocation, financial dependents, etc. If one is investing for more than 5 years than only one should invest in equity mf otherwise should choose debt mutual funds.
3. Diversification: It’s an old saying “Do not put all your eggs in one basket.” Thus follow this rule and diversify your investments in different mutual funds and that too of different categories. This can reduces portfolio downside risk.
4. Do your own research: It is advisable to choose funds after a good research. If you are new or do not have time or knowledge, it is best to take the help of a Certified Financial Planner.
5.Asset Allocation: Equity has a higher risk as compared to debt mutual fund. Therefore, it is advisable to maintain good equity: debt ratio to have balanced risk and return.
6.Portfolio Review: How good mutual fund you choose today, but funds performance keeps on changing with market dynamics.
Therefore, it is best to have a Portfolio Review from an expert, for good returns with low risk
- Financial Plan: It is best to invest in line with your financial life goals. Stick to your Financial Plan, as it gives you a roadmap to your investments. You come to know-how, what and where of your investments.
Conclusion
Walking on a busy road might be risky but if you opt for the right tactics than you reach your destination safely in no time.
Similarly, if you opt for the right strategies then there is NO RISK with mutual funds too.
So what are you waiting for? Invest right Now and fulfill your dreams into Reality.
