You might have heard too much about mutual fund investments in recent years, but have not yet decided whether to invest in mutual fund or not. Generally people used to stay away from mutual funds due to the risk factor in investment. I am sure the statement mentioned in every mutual fund advertisement is scaring you from taking any decision.
The famous quote is here: ” Mutual Fund investments are subject to Market Risks, read all scheme related documents carefully before investing!”
Now the question is whether mutual fund investments are really risky? Then why people are saying so much positive and even best alternative of typical tax saving options in India? In this article I will try to share my understanding of mutual funds and where people are getting confused and find this as risk investment option.
Do you know how mutual fund works?
In simple terms if I ask you what is a mutual fund or where exactly a mutual fund invest your money? I am sure many people will say that mutual fund investments are directly linked with share market. But this is a wrong perception as all mutual funds don’t invest money in equity all the time. Here are the various types of mutual funds available in market right now.
- Equity Funds / Growth Funds
- Diversified Funds
- Sector Funds
- Index Funds
- Tax Saving Funds
- Debt Fund / Fixed Income Funds
- Liquid Funds / Money Market Funds
- Gilt Funds
- Balanced Funds
- Exchange Traded Funds (ETFs)
That means, your money is not always invested in share market directly. The type of fund you are selecting, based on that money will carry risk. So, that doesn’t mean that every mutual fund investment is having the same risk profile and in other way every mutual fund investment will not give you higher return.
Some may give less but guaranteed return over time in case the debt part is high. When the riskier funds generally give good return in long term, but in you are unlucky they may ruin your investment which is not frequent if you follow simple rules to choose the best mutual fund for long term investment.
How much guaranteed is your investment
Due to fear of loss, mostly people depend up on bank FDs, PPF, post office small deposit schemes, recurring deposit schemes to get guaranteed return. Do you know where your money is invested on those investment tools? And are you sure those investments are 100% secure?
Debt investments are considered as safest with guaranteed return. And in case of mutual fund also, you can opt for debt option to avoid risk. For them who want to take risks, better to go for equity mutual funds.
Now why it is better to buy mutual funds compared to equity? I think in case of equity you need enough knowledge and you can hardly buy few shares, where as in case of equity mutual funds you can invest in many shares of many companies which will further mitigate the risk of stock market compared to direct stock investment.
So, the risk in investment is always depend on where exactly you want to put your money to grow? I don’t think the entire mutual fund category should be labeled with such term “is mutual fund investments are subject to market risk“. This statement is 100% true for equity mutual funds.
Did you started investing in mutual funds? I have started recently through FundsIndia.com and so far it is a good experience. I am investing almost all equity linked funds only. What about your experience, I think this is the best place to discuss on this topic. Do share your experience or any query here by writing a simple comment below. Thanks for sharing this article.