In daily course of life, you may often come across with mutual fund advertisements which ask you to read the offer documents carefully before investing. The advertisement also makes you alert about the risk which you take while you go for mutual fund investing. Since we all know that whether equities, debt or liquid funds in which we want to park our money are directly dependent on the volatility of stock market conditions. So, in such a case, returns delivered are hopeful “finger-crossed” i.e. either they are going to meet up your expectations or in most of the cases do not.
Everyone wants to avail guaranteed returns whichever investment an investor would like to undertake. But are mutual funds guaranteed? still, doubts the mindset of every investor. If it does not get answered in time then the new investor seekers will remain in confusion and always hesitate to take a step forward in the field of mutual fund investments.
Since the funds designed under several categories are directly linked to the stock market, it remains under the discretionary power of mutual fund managers to select the best pick for creating a portfolio composition of stocks (which you get to know from the factsheet) that would easily exploit the fundamentals of market conditions. The research activity done by the team of professional fund manager and the skills exercised for selecting the individual security within the fund composition is a very decisive factor upon which phenomenal returns are based. However, the past experience of the fund manager need to be very well assessed before going for mutual fund investment.
Moreover, as an investor, you may very well be concerned about the safety of your principal amount in the wake of not losing it in the confines of stock market fluctuations. So, choose your mutual fund product cautiously.
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Are mutual funds good investments?
No doubt mutual funds are a good investment if you are confident about your investment goals. Your goals should align with respect to your mutual fund objective in which you have invested along with your risk taking capacity and the time frame for which you have planned to remain invested. Always remember to assess your financial goals carefully before opting for any mutual fund as mutual funds are plenty in the market. And in which stage of lifecycle you are- whether in early 20’s , 30’s or 40’s also help you in making decisions while selecting your desired mutual fund scheme.
For equities, the more you stay invested such as longer than 5 years, the more potential you will develop for amassing potential returns from such funds. On the other hand, debt mutual funds are apt for risk-averse investors in such instances if they aren’t comfortable investing in the volatility of the stock markets. The middle-aged investor in their early 30’s usually starts considering more of debt funds as compared to taking the risk in equities.
Liquid funds are apt for those with an investment horizon of less than a month and are ideally used to park money rather than keeping your money idle in savings bank account at very low-interest rates. For investors parking their money in ultra-short term funds, the tenure spans from less than 90 days and can be considered over short-term fixed deposits by many investors.
Are mutual funds safe?
As you know that fixed deposits are losing its sheen from the market and are not apt for those investors who want higher returns over a period of time. But what about those investors who really want to try their luck out while going safely investing in mutual funds? Before that, we should know what are the various investment avenues in mutual funds that can actually make your investment safe? Let’s understand “safety” in terms of investment:
Safety in terms of the company or institution working under the directives of the regulatory bodies for keeping your investment safe.
Safety in terms of providing capital protection and guaranteed returns
Safety can also be fundamentally relied upon the working operations of the mutual fund companies which are regulated and supervised by governmental bodies like the Securities and Exchange Board of India(SEBI) and the Association of Mutual Funds in India(AMFI). Investors need to be aware of that the license to operate a mutual fund company is given after thorough due diligence as in the case of issuing licenses to the banks. In short, a mutual fund company is equally safe as a bank.
Are mutual funds Guaranteed?
Since mutual funds don’t guarantee you the capital protection of fixed returns but it provides you higher returns provided you need to stay long in your investments. Moreover, mutual funds are also tax-efficient as compared to traditional products. Short-term and long-term gains from mutual funds are taxed in such a manner that it doesn’t eat into your returns.
Mutual funds make most of the sense in the longer term and will support your longer stay in the form of returns that will start amassing constructive returns.This is because of the power of compounding where your returns will be rewarded to you in compensation for risk which you have endured it throughout the times you continued staying in your current mutual fund product. Over most long periods, your superior returns on your equity mutual fund can start beating the prevailing rate of inflation provided you should have managed your investment by diversifying your mutual fund product across different asset classes in your own portfolio.
To sum up, mutual funds are safe. Investors should not worry or become anxious about losing their money while investing in them. Just focus on the right kind of mutual fund to match your investment objective and your mutual fund’s long-term objective. As you know time is a great healer, so the time also makes mutual funds safe and rewarding for you. So, be patient and invest wisely!
Investment in Guaranteed Mutual Funds
As mutual fund products start giving you some way guaranteed returns in the longer time frame of more than 5 years in the case of equity but how about getting invested in guaranteed investment products like fixed-income products. Well, in such case look for fixed income products.
The guarantee which you may seek depends on the following factors:
1. While investing in debt mutual funds or fixed income products, check-out the issuer of those selected debt instruments(like bonds) or money market instruments (like treasury bills). The issuer should be a governmental regulatory body/company/institution. This way you can proportionally minimize the credit-risk or risk of default upon investing in fixed-income products.
2. Hold on to fixed-income products until maturity. This way you will escape from penalty clause on premature withdrawal.
3. The investment’s maturity exactly matches your investment horizon. If your time horizon exceeds the maturity period of your investment, the rate of interest will stand to be different where your investment proceeds continue to become invested.
4. When you donot take any regular interest payments.
Since the investment proceeds, you receive need to be reinvested back to derive the benefit of compound interest. Again, it is difficult to anticipate the rate of interest available when you obtain these interest payments.
Note that it is the fixed income instruments that provide you guaranteed return for the period for which it is issued on the condition that the entire interest obtained on a cumulative basis and the issuer honours its obligation. This means you do not know how much returns you would avail throughout your lifetime through your investment in a portfolio of different fixed income investments.
As you know that a fixed income mutual fund is a portfolio of fixed income instruments. However, the portfolio returns cannot be guaranteed. At the same time, for offering a guarantee, your mutual fund need to absorb all the fluctuations in the returns it generates. That would necessitate the fund manager to assess the portfolio return and then retain some margin of error and guarantee the returns. In other words, prepare yourself to get lower returns due to the margin of safety.
While investing in fixed income mutual funds, be assured that your capital is not insured by a third party even. Since these schemes invest a major corpus in debt instruments which safeguards the downside and the higher returns are brought by the capital invested in the equity portion which generally allocates around 20% of the total investment amount. No doubt your fixed income funds have to face volatile market conditions but these schemes are comparatively safe as compared to equities and come with a maturity period of three to five years. Even you can look to invest in FMP series of shorter duration like in months.
How to Invest Safely in Mutual Funds?
In order to go safely in mutual funds, look for parameters like performance returns of mutual fund schemes based on their investment objective and performance benchmark indices like BSE SENSEX (Sensitive Index), S&P CNX Nifty, etc.
Look for past-performance (1 year, 3 year & 5-year returns) although past performance doesn’t remain same in the future, also check fund manager’s experience in handling the fund, credit rating score and then decide your specific mutual fund scheme to invest in.
Disclaimer : Mutual Fund Investments are subject to market risks, read all scheme related documents carefully before investing.