Are Mutual Funds Safe? What Are The Risks Of Investing In Mutual Funds?
Last Updated: Jan -21-2020
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Investing in Mutual funds is a preferred investment option for many. Although it comprises of several risks, the returns are also high which makes it so popular among new and experienced investors.
Despite being so favorable, there are questions in the minds of investors that need to be addressed. In this blog, we will understand the risks involved in mutual funds and are they really a safe investment option to choose from.
Traditionally, the Indian tendency is to make safer capital investments which is why there are more investments done in fixed deposits and recurring deposits. The FDs and RDs can be easily opened at banks or at post offices. Thanks to technology, they can now also be opened online through net banking.
Investors are unable to make up their minds on mutual funds because many fund companies remain unknown to a common investor. Common man has seen how the chit funds and other mutual fund companies have faced scams and suffered losses. This is what has created trust issues.
Generally, frauds related to financial investments include either the company disappearing with your money, or simply ensure guaranteed returns.
Whenever it is about safety, it can be measured in two ways
- Security in terms of the company or institution disappearing with your invested money
- Safety in terms of offering capital protection and guaranteed returns
Experiencing safe investment does not only depend on the product you choose but starts from the time you pick your product. One must remember that no investment is 100% risk-free and involves some amount of risk for sure. Same applies for mutual funds.
However, if you worry that some morning you will wake up to find that the company you invested it has closed down, then that’s never going to happen in case of mutual funds. Mutual funds are extremely safe in this matter. This is because, mutual fund companies are regulated and supervised by regulatory agencies such as the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). Any mutual fund company who wishes to trade is given a license only after thorough due diligence, just like for banks. Hence, a mutual fund company is as safe as a bank.
Mutual Funds are also famous because they offer tax benefits. They do not guarantee capital safety; however, the returns are really good. The sole purpose of investing in mutual funds is high returns which is not the case with any of the traditional investment options. This is because of better market exposure and professional fund management. And, the best option for mutual fund investment is Systematic Investment Plan (SIP).
Both short-term and long-term mutual funds offer tax benefits. Needless to say, the long-term investments offer more returns that the short-term investments. Larger the tenure of investment, more is its return. This happens due to compounding.
Here are some more benefits of investing in mutual funds:
- Mutual funds offer systematic investing and withdrawal which means that you can invest and withdraw as per your convenience and budget without having to worry about any personal expenses.
- Mutual funds offer automatic reinvestments wherein the investor can automatically have capital gains and dividends reinvested into their mutual fund without any extra fees.
- Mutual funds offer transparency which ensures that there is no fraud and investors are getting paid as per their investments made.
- Mutual funds are liquid which means they can be sold and liquidated immediately. Some mutual funds take up to 3 days to liquidate. However, they are faster than some other investment assets like real estate.
- Mutual fund companies and their performances are regularly audited which ensures that investors can trust the mutual fund’s stated returns. These reports are available to the public through the company’s prospectus.
One tip that most of the investors can follow is to diversify. In order to reduce the risk involved in mutual fund investments, it is recommended to diversify your investments. Experienced investors know that market fluctuations happen all the time and one should not be worried about the short-term fluctuations happening.
Another helpful tip is to choose an investment plan that best suits your risk-taking capacity. For instance, if a person is used to conservative style of investments, then he must not try and invest in small or mid cap companies since there is more risk involved in there.
People who say that mutual funds can be risky to invest generally refer to risks like market risks, liquidity risks, credit risks, interest rate risks, currency risks, and so on. To make it simpler for a newbie to analyze the risk factor of a mutual fund, there are five different levels of risks under which every mutual fund can be classified. The investor can assess these risks and decide which one to choose.
- Low-risk Level – Mutual funds that come under the low risk-level category are generally built of securities and instruments like glit funds and government securities. This is the most suitable type of mutual funds for investors who do not want to opt for safer income sources.
- Moderately Low-Risk Level – These mutual funds include bonds and short-term securities whose tenure is just 1-3 years. Which means the investment is exposed to risk for a shorter-term.
- Moderate Risk Level – This includes MIP – Monthly Income Plan that do not offer guaranteed returns. These funds are suited for semi-conservative investors and is ideal for medium to long-term investment.
- Moderately High-Risk Level – These mutual funds have good exposure to equity and related instruments and involve investing in companies in the large-cap segment. These mutual funds include high risk and the money must be invested for longer tenure to gain greater returns. It is suitable for investors who are willing to take high risks.
- High-Risk Level – The mutual funds in this category are international funds, sectoral funds and so on. All of these include high risks but also offer very high returns. It is suitable for investors who have high risk-taking capability.
If you are new to mutual fund investments, then it is recommended that you hire a mutual fund advisor who can guide you through all your investments until you understand the finances well. It is important that you gain enough knowledge, experience and confidence before you start taking care of your investments on your own.
It is clear by now that mutual fund investments are safe. As you will be investing your hard-earned money, you must be careful and scrutinize from several mutual fund companies, the one which matches with your investment goals. Also ensure that you invest for longer term in order to gain maximum benefits. Conduct thorough research about the company and its performance before making your investment.
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