Mutual funds listed by NSE India are instruments linked with the market, which invest in equity and equity-related securities, money market instruments and debt. Mutual fund schemes’ net asset value is dependent on the market price of the underlying securities in the portfolio. The value of the securities might increase or decrease on the basis of market movements. This is why you acknowledge the disclaimer: mutual funds are subject to market risks. The article will help you understand if mutual funds are safe and the risks associated with mutual fund investing.
Are mutual funds a safe investment?
Investors, who only invested in traditional fixed income investments, such as post office small savings schemes or bank fixed deposits, have often come up with two questions along with their first mutual fund investment. The amount of returns they will get, and whether mutual funds are safe investments or not. It is crucial for each investor to understand the following points:
Mutual fund investments do not come with assured returns
Even when a mutual fund scheme pays regular dividends, the dividends investors receive from mutual funds are not fixed. The asset management company might optimise the dividend payout rate and can also stop giving out dividends for a certain time. As considered right according to the market conditions.
Mutual fund investments do not come with a guarantee of capital protection. Hence, when investing in mutual funds, you must be ready to encounter certain risks. But if you are aware of the risks and make smart investment decisions on the basis of your financial objectives and risk appetite, mutual funds come with investment solutions for a wide range of investment needs and risk appetites.
Mutual fund investment: risks associated
Certain common risks that are associated with mutual fund investments include the following:
- Equity funds come with the highest risk because stock prices fluctuate quite frequently.
- The performance of a fund is dependent on the expertise of the fund manager in selecting the stocks and timing decisions.
- Sectoral funds and closed-end funds come with higher liquidity risk.
- Debt funds come with a risk of default on principal/interest payments by bond issuers.
- Sectoral or thematic funds come with a higher rise because of a lack of diversification.
How safe are mutual funds for retail investors?
Even though mutual funds come with certain risk, to invest in SIP is quite favourable for retail investors as compared to investing directly in debt or equity, especially for novice investors, because:
- By investing in systematic investment plans, investors can invest small amounts in a mutual fund regularly. This creates an average of the purchase cost over time and minimises risk.
- As managers perform all the analysis, research and other trading activities on your behalf, you do not need any specific skills to invest in mutual funds.
- When investing in a mutual fund, your funds are diversified with multiple other investors, resulting in better diversification.
- Mutual funds undergo regulations to protect the interests of the investors and ensure transparency.
- Most of the mutual funds come with low investment requirements, making them easily accessible for all investors.
Conclusion:
Even though mutual funds are accompanied by risks, they provide a low-cost, safe and convenient investment tool for retail investors participating in debt and equity markets. By integrating a disciplined approach, investing for the long-term and diversifying your portfolio, safe mutual funds may help investors achieve their financial goals, along with lesser risk. However, make sure to consult a financial advisor and conduct detailed research before selecting the mutual fund scheme for your investment.