Are Mutual Funds Safe to Invest In?
Mutual funds are investment vehicles that pool a group of people or institutions and invest their money in bonds, stocks, and other securities. A fund manager, who is usually a finance expert, manages the investment and provides maximum returns to investors by putting the amount in various securities that are in accordance with the mandates stated in the mutual fund’s prospectus.
A mutual fund provides individual investors with access to professionally managed portfolios and allows them to invest in a large number of securities. The performance of a fund is usually tracked based on the change in the total market cap of the fund — derived by averaging the performance of each underlying investment. Every shareholder, therefore, makes a profit or loss directly proportional to the amount they invest. The price of the fund unit is referred to as the net asset value (NAV) of the mutual fund. It is the price at which an investor buys or sells fund units of a scheme. The NAV is calculated by dividing the worth of total assets in the portfolio minus liabilities. Mutual fund units are sold and purchased at the prevailing NAV.
Types of Mutual Funds
Mutual funds in India are classified into equity funds, debt funds, and hybrid mutual funds, depending on their equity exposure and asset allocation. Therefore, the associated risk and returns provided by a mutual fund scheme would depend on its type. We provide an analysis of numerous types of mutual funds below:
Equity Mutual Funds
As the name suggests, equity funds invest primarily in equity shares of companies across all market capitalizations. A mutual fund is an equity fund if at least 65% of its portfolio is invested in equity instruments. The returns offered by equity funds depend on market movements and have the potential to be the highest among all classes of mutual funds. These can be classified into small-cap funds, mid-cap funds, large-cap funds, multi-cap funds, sector funds, index funds, and Equity-linked savings schemes (ELSS). The latter is covered under Section 80C of the Income Tax Act, 1961, providing investors with tax deductions of up to Rs. 1,50,000 every year.
Debt Mutual Funds
Debt mutual funds invest in debt, money markets, and other fixed-income instruments such as treasury bills, certificates of deposit, government bonds, and various high-rated securities. Debt funds are a good choice for risk-averse investors as their performance is not influenced too much by market fluctuations, making the returns somewhat predictable. Debt mutual funds are divided into dynamic bond funds, income funds, short-term and ultra-short-term debt funds, liquid funds, gilt funds, credit opportunities funds, and fixed maturity plans (FMPs).
Hybrid Mutual Funds
Investing in hybrid funds is a great way to reduce the risk of exposure across asset classes as they allow you to invest in both equity and debt instruments. They can be of various types:
- Equity-oriented hybrid funds
- Debt-oriented hybrid funds
- Monthly income plans
- Arbitrage funds
Depending on the market conditions, the money manager would modify the fund’s asset allocation to maximize benefits to the investors. The primary purpose of hybrid funds is to balance the risk to reward ratio by providing a more diverse portfolio.
Are Mutual Funds Safe
Mutual funds come with a certain level of risk. You stand a chance to lose the money you have invested in the securities held by a fund go that far down in value. Dividend payments may also change based on market conditions. However, all mutual funds are registered with SEBI and function within the provisions of strict rules and regulations created to protect the investor’s interests. And long term investments in mutual funds have the potential to offer you adequate returns.
Mutual funds provide diversification to the investor’s portfolio at a low cost. By investing in a single fund, you can get exposure to at least 30-40 stocks. An investor can opt for a Systematic Investment Plan (SIP) to invest a fixed amount periodically. You can start the SIP with an initial amount as low as Rs. 500, which can be transferred automatically from your registered bank account every month. Mutual fund investors can also quickly redeem their shares at any time for the current NAV plus any redemption fees.
Moreover, mutual fund companies hire professionals with vast experience who have spent dedicated time in the capital market to manage their investors’ money. All portfolio-related details are disclosed regularly to enable investors to understand what proportion of fund money is invested in which particular instruments. This makes investing in mutual funds a reliable and transparent option.
To Sum It Up
Mutual funds are growing in popularity as a valuable investment vehicle. It is crucial to choose an appropriate mutual fund scheme based on your investment objectives and risk tolerance. You can invest in mutual funds online by visiting the website of a fund house, filling up the required application forms, and completing your eKYC (Know Your Customer) compliance by submitting your Aadhaar Card and PAN details. The offline investment route involves visiting the branch of the mutual fund house or investing in a plan through a mutual fund distributor.