Are you worried about investing in mutual funds? Are you still thinking if mutual funds are safe? Several factors have led to a general lack of trust about mutual funds, but do they all make sense as an investment option?
This article covers the following:
1. Mutual Funds: Is the Fear Warranted?
Traditionally, Indians have chosen investments that guarantee the safety of capital invested and offer fixed returns. This is a significant reason behind fixed deposits (FD) and recurring deposits (RD) gaining the faith of the Indian investors.
Furthermore, FDs and RDs can be done at banks and post offices, which are seen as the safest places where one can invest.
Mutual funds did not garner the same kind of trust as many fund companies are not known to the investors. Mutual funds have also suffered because of quick-money schemes and chit funds, which promised high returns but looted investors of their money. It is because of these reasons that mutual funds are not perceived to be as safe an investment option as bank deposits. However, that is not true.
2. So, are Mutual Funds Safe?
As far as investments are concerned, safety can be ascertained in two ways:
a. Security in terms of the company or institution running away with your investment
b. Safety in terms of offering capital protection and fixed returns
While no investment is 100% risk-free, our in-house experts at ClearTax have handpicked the best-performing mutual funds by researching various fund houses in the country. However, what you need to know the following before investing:
a. No one will run away with your money!
If you are worried about flight a fund house running away with your hard-earned money, then rest assured because mutual funds are completely safe. You will not wake up one morning to find out that the fund house you have invested with has run away with your money. That is never happening!
Why do we say this? As mutual fund companies are regulated and supervised by regulatory agencies such as the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI), no fund house can abscond with investors’ money. The license to run a mutual fund company is given after as much due diligence as is done while giving banking licenses to banks. In short, a mutual fund company is as safe as a bank. The flight risk is, therefore, non-existent.
b. Mutual Funds are meant for earning higher, tax-efficient returns
Indeed, mutual funds don’t guarantee capital protection or fixed returns. However, that is a good thing because mutual funds would be poor investment products if they did.
The purpose of investing in mutual funds is to earn higher returns than what traditional investment options offer. These returns are the result of more extensive market exposure and professional management of the funds. All this is available at a nominal initial capital via the Systematic Investment Plan (SIP) route.
Mutual funds are also more tax-efficient than traditional investments. Short-term as well as long-term gains from mutual funds are taxed in a way that it doesn’t eat into the returns. These funds make much sense as long-term investments because the longer you stay invested, the more profits you earn. This is because of the power of compounding where your returns, in turn, make returns.
Over long periods, mutual funds have given superior returns that have beaten traditional investments and also been higher than the prevailing rate of inflation. The risk that comes with mutual fund investments can be managed by diversifying your investments.
3. The Last Word: Should you Invest in Mutual Funds?
In a nutshell, mutual funds are safe. Investors should not be worried about short-term fluctuations in the returns while investing in them. You should choose the right mutual fund, which is sync with your investment goal and invest with a long-term horizon. Just as time heals everything, time also makes mutual funds safe and rewarding!
Before you invest, it is advisable to research and read more about mutual funds in general. Different funds will give you returns based on market performance and their historical graph.
Alternatively, you can invest through ClearTax’s online platform, which assures you a portfolio based on your needs.
If you need help, remember that we always have your back. You can speak to our experts and learn about mutual funds before investing.