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Are mutual funds safe

No one wants to erode their hard earn money, and being an Indian investor we have tendency to save more and secure our investment to the extent possible. While investing the first thing most of us look at is the security features in the investment product. At least, it was at most priority for our elders because investment market and products were developing that time and the product available was no so much regulated.

With the development in the products and their security features, most of the things have change from then to today. People are ready to take more risk to get quicker returns, their disposable income has increased, there are more developed markets are products are available now which has not only encouraged investors to invest but also it has become an unconscious choice without which most of our dreams may remain unaccomplished. One of the most popular product as per investors choice is Mutual funds.

What does “Safe” mean to you?

There are different connotations as per different investors. For one safe is guaranteed returns, for another at least my principal should be protected while few think that my money should grow irrespective of market condition.

Doing safe investment doesn’t only depend of the product you choose but it starts from the time you pick your product. Understanding own risk profile, time horizon, financial needs and purpose of investment.

Are Mutual funds safe?

The most secured product considered by our elders was Fixed or recurring deposits, because it is managed by the banks which are regulated by RBI. Banks are supposed to have a huge deposit with them so will almost guarantee return on investments.

You must have heard or read mutual funds are subjected to market risks, please read all scheme related documents before investing. This hold true not only for mutual funds but for any product you want to invest in. It’s really important that you understand the product’s risk, where does it invest, is it managed by a professional?

When it comes to safety of investment investors are mostly concerned about 2 things

  • Capital protection
  • Fraudulent

Capital protection:

Mutual funds as a product don’t guarantee returns but the risk is minimized in various ways. Like mutual funds are managed by professionals and experts so anyone who doesn’t have much knowledge about it can also invest in it. The risk is also reduced with diversification, as mutual fund invest in portfolio which is a combination of securities, rather than betting on single stock or bond, the risk is divided under various securities. You can timely review performance of your mutual fund so save it from market correction and switch you investments as and when needed.

Also choosing investment which suits you will save you from unnecessary losses. Like a conservative investor should avoid investing in small and mid cap funds where volatility is quite high, they can focus on hybrid funds or debt funds.

Fraudulent:

It’s a no less than a nightmare that someone runs away with your hard earned money. This may make us think how much is it safe to invest in mutual funds? To safeguard investor’s interest, mutual funds are regulated by SEBI and AMFI. Mutual fund companies also work on licenses same as banks and they also need approvals and have to follow due diligence before taking investor’s money. Mutual fund companies cannot simply close and get away with your money. This makes mutual fund as safe as banks.

Many investors are afraid to invest with distributors. Kindly rest assured that even if tomorrow the distributors or the agent’s company is closed, you can always reach the asset management company of the mutual fund and redeem your units.

Different types of risk associated to mutual funds.

  • Market risk
  • Liquidity risk
  • Credit risk
  • Interest rate risk

How can I asses are mutual funds a safe investment?

Association of Mutual Funds in India (AMFI) has clear guidelines on how a fund would be classified under the different levels of risk.

Riskometer has 5 levels and it is designed for every mutual fund available in the industry so that investors and understand and match it with their own risk profile. It has color codes and looks like and car speedometer.

Low-risk level

These are considered the least risky of all the Mutual funds. Mutual funds with low risk level have their portfolio built of securities and instruments like gilt funds and government securities. These are most suitable for people who are looking for safer income sources. However it doesn’t guarantee returns.

Moderately low-risk level

The portfolio of this risk level mutual funds include bonds and short term securities, the maturity for which is not more than 1 to 3 years, that’s why there is lower interest rate risk. These are suitable for investors who have at least 2 to 3 years of investment horizon.

Moderate risk level

It signifies that the funds in this category have their principal at a moderate risk. Instruments such as MIP funds. MIP stands for monthly income plan, however doesn’t guarantee returns This category of funds are suited for a semi-conservative investor who intends to book decent profits at the same time wants to keep his risk limited. Funds under this label are suited medium to long-term investment horizon.

Moderately high-risk level

These mutual funds have good exposure in equity and related instruments. They are usually balanced and equity oriented, index, diversifies and ETFs. Products under this label are suited for investors seeking to create wealth over a long period of time. Investment in equity under such funds is related to the large-cap segment.

High-risk level

Sectoral funds, thematic funds, International funds are a few examples of funds under this label.


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