How Safe is the Money I Invest Through Mutual Funds?

Introduction:

George is a new investor. One of his FDs has matured, and he now aims for better returns. So, a part of the fund was reinvested in another FD, offering a better rate than the previous one. Then, he thought to give share markets a try. George later changed his decision because his friend suggested that he go for mutual funds instead, as it would better suit novice investors. But he hesitated because even the mutual funds invest in stocks and other instruments. So how is his money safer? Let's figure out by understanding the concept of mutual funds from the basics.

What are mutual funds?

A mutual fund is an investment vehicle in which a group of investors pool their money intending to earn a return on their investment over time. An investment professional known as a fund manager or portfolio manager oversees this pool of funds. Their responsibility is to invest the collected funds in various securities such as bonds, stocks, gold, and other assets to maximise returns for the mutual fund investors. The investors share the gains (or losses) on the investment in proportion to their contributions to the fund. Mutual funds can be debt, equity, or a mix of the two called balanced funds.

Additional read: ICICI Direct- Types of mutual funds

When introducing mutual funds in an advertisement, many say the mutual funds are subject to market risks. Still, it is often advised to invest in mutual funds. Why?

What makes a mutual fund investment safe?

1. Regulated:

If you're concerned that mutual funds are a type of dodgy investment, rest assured that they're completely safe. No mutual fund house can steal your money because it is regulated and supervised by the SEBI (i.e. Securities and Exchange Board of India) and the AMFI (Association of Mutual Funds in India). Moreover, the licence to operate a mutual fund house is granted after due diligence, much like a bank's banking licence. That ensures safety of your investments in the mutual funds.

2. Diversified portfolio at low cost:

Diversification lowers your portfolio's risk by absorbing the adverse effects of a few securities in the overall portfolio. Building a diversified portfolio individually can be expensive and complicated, but it is a built-in feature in a mutual fund. So even if you invest as little as Rs.500, you will be putting your money into a well-diversified portfolio spanning industries and sectors and sometimes, even across asset classes.

3. Professional fund management:

Your money in mutual funds is managed by skilled and experienced professionals. They make investment decisions based on thorough research and closely monitor the holdings. So, all that you require is to put the money into a mutual fund scheme based on how much risk you're willing to take and your investment horizon.

As you may have heard, mutual fund investments are subject to inherent market risks, credit risks and interest rate risk. But this can be managed easily with regular reviews and suitable choice of investment. For example, you can opt for debt funds when your investment horizon is less than three years. For a tenure beyond that, you can opt for hybrid funds (moderate risk), large-cap equity funds (moderate to high risk) or sectoral funds (high risk). Another option is to go for SIP (systematic investment plan) that enables you to invest a set amount in mutual funds regularly. With this the investment cost will be averaged and you will stay protected against extreme market fluctuations too. You can easily outsmart inflation and earn good returns in the long run. With mutual fund investment, you can take advantage of all of these benefits.