What are the Risks and Rewards of Mutual Fund Investment?
Last Updated : Aug. 23, 2017, 11:13 a.m.
Mutual funds are regarded as one of the safest investments around as they diversify the money across a multitude of equity and debt instruments. The experienced fund managers use their years of expertise to balance the portfolio and ensure a good return for the investors. Besides, these managers also keep an eye on the investment objectives of different funds. So, their mode of operation and investment strategy can differ from funds to funds. A fund manager ensures a proper mix of asset allocation to counter varied market situations and fulfill the objectives. The hard work put in by the manager often leads to a series of rewards for the investors to earn. So, let’s read out the rewards you can have while investing in a mutual fund.
Types of Rewards
Mutual funds have the potential to appreciate the growth of capital, generate regular income, provide liquidity, etc. All these can make your MF journey a memorable one.
Return
The return potential, particularly in the case of equity funds, is expected to be on the higher side. These funds invest predominantly in the stocks of different companies with distinct market capitalizations. The fund managers also look to widen the portfolio of investors by investing in various sectors of the economy. The capital appreciates on the back of positive cues developing in several sectors like automobile, information & technology, FMCG and others.
So, if you have a long-term investment approach, you can invest in equity funds and get the inflation-adjusted returns, which can be in the form of capital gains and dividends.
Regular Income Generation
Mutual funds, besides capital appreciation, also fulfill the need of investors looking for a stable flow of income. The debt funds are the ones that you can bet on to generate regular income. These funds invest in bonds, debentures and money-market instruments to fulfill the same. Debt funds have a massive classification of funds, including liquid funds, income funds, bond funds, gilt fund, and much more.
Portfolio Diversification
One of the factors that let a mutual fund stands out from the clutter is its ability to diversify the investments across a wide range of equity and debt instruments. While the equity instruments appreciate the growth of the money, the debt counterparts ensure regular income for the investors.
A fund manager checks the track record of the securities and chooses those that have performed excellently in both good and bad situations. The greater diversification heightens the scope for massive returns on the invested capital.
Economy of Investment
The mutual fund investment is economical as you can join the asset class by paying an amount as low as ₹500 on a monthly basis with a Systematic Investment Plan (SIP). An SIP is a disciplined approach to investing in a mutual fund at periodic intervals-daily, weekly, fortnightly, monthly, quarterly, half-yearly or annually. You can also switch to a lump-sum, one-time investment option and systematically withdraw the money from the same. Also, you have the facility to transfer your portfolio from one fund to another by availing the option of STP, which stands for Systematic Transfer Plan.
Fulfillment of Financial Goals
A mutual fund is an appropriate investment vehicle to achieve your financial goals like the purchase of a home, emergency corpus, vacation funds, education & marriage of your kids, and even the income generation needs.
Tax Benefits
Equity Linked Savings Scheme (ELSS), a part of equity mutual fund, lets the investors avail tax deduction on their investment for upto ₹1.5 lakh in a financial year. The tax deductions can be claimed under Section 80C of the Income Tax Act. ELSS, though, comes with a lock-in-period of 3 years.
Liquidity
Mutual funds offer a high degree of liquidity by allowing investors to redeem as and when they deem fit to do so. Of the mutual funds , liquid funds top the chart in terms of liquidity by allowing instant redemption wherein the money comes to the bank accounts instantly.
Regulation
Mutual fund firms are regulated by the Securities and Exchange Board of India (SEBI), the market regulator. As part of the regulation, these firms are mandated to disclose all the details pertaining to the investment to the SEBI. The transparent process helps gain the confidence of the investors.
Risks to be Wary of
However, there are a few risks you need to be mindful of while investing in a mutual fund. These risks can be on the grounds of economy, liquidity and others. So, check out the risks that the fund managers face in their way of appreciating the growth of the capital and generating income for the investors.
Macroeconomic Risk
Macroeconomic indicators like inflation, currency, interest rate and others can cause a volatility in the stock and bond prices, which would eventually impact your MF investments.
Liquidity Risk
Liquidity risks arise when you invest in a close-ended fund having a certain lock-in period. So, if you want some money to meet any emergency needs, you can’t withdraw the same from the fund before the expiry of its lock-in period.
Interest Rate Risk
The interest rate risk emerges more in the case of the debt funds, which invest mainly in corporate bonds and instruments alike. A rise in the interest rates may lead to the fall in the value of underlying securities.
Credit Risk
The bond fund investment does pose a credit risk when the borrower defaults or delays on principal and interest repayments.
Disclaimer – Mutual Funds are subject to market risks. Please read the scheme related documents carefully before investing.