Are Mutual Funds Safe? What Is the Risk of Investing In a Mutual Fund?

Updated on: Jun 28th, 2022


6 min read

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 understanding of mutual funds, but do they all make sense as an investment option? 

Mutual Funds: Are the Fears Warranted

Traditionally, Indians have chosen investments that guarantee the safety of the capital and offer fixed returns. This is a significant reason behind fixed deposits (FD) and recurring deposits (RD) gaining popularity in the country.

Furthermore, you can invest in FDs and RDs at banks and post offices, which are seen as the safest places for investment. Mutual funds did not garner the same kind of trust as many AMCs are not known to the investors.

Mutual funds have also suffered because many people believe they could lose money as returns are not guaranteed. Moreover, they come with a warning stating mutual funds are subject to market risk.

It is because of these reasons that mutual funds are not perceived to be as safe an investment option as bank fixed deposits. However, this is not true as mutual funds can give you inflation-beating returns if you understand the investment and invest depending on your financial goals and risk profile.

Are Mutual Funds Safe

You can ascertain the safety of an investment in two ways:

  • Security in terms of the company or institution where you have the investment running away with your money.
  • Safety in terms of 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 mutual fund houses in the country. However, you need to know the following before investing:

No one will run away with your money

If you are worried that mutual funds are a type of flight-by-night scheme, then rest assured that mutual funds are completely safe. You will not wake up one morning to find out that the mutual fund you have invested with has vanished along with your money. That is never going to happen! 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 the investor’s money.

The license to run a mutual fund house is given after due diligence in a similar way as banks get the banking license. In short, a mutual fund house is as safe as a bank.

Mutual Funds are meant for earning higher, tax-efficient returns

Mutual funds don’t guarantee capital protection or fixed returns. However, this is a good thing as mutual funds would be a poor investment product 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 mutual funds.

Mutual funds are also more tax-efficient than traditional investments. Moreover, the twin benefits of inflation-beating along with tax-efficient returns make mutual funds the choice of investment for seasoned investors.

Short-term as well as long-term gains from mutual funds are taxed in a way that doesn’t eat into the returns. These funds make sense as long-term investments because the longer you stay invested, the more are the returns you earn.

This is because of the power of compounding benefit where your returns, in turn, make more returns. Over longer time 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 and investing based on financial goals, time horizon and risk tolerance.

Should you Invest in Mutual Funds

Mutual funds are a safe investment if you understand them. Investors should not be worried about the short-term fluctuation in returns while investing in equity funds. You should choose the right mutual fund, which is in sync with your investment goals and invest with a long-term horizon.

Before you invest, it is advisable to do your research and read more about mutual funds. There are several types of mutual funds suitable for different kinds of investors such as aggressive, moderate and conservative.

You can invest through ClearTax’s online platform, which offers a plethora of mutual funds based on your financial goals. You can speak to our experts and learn about mutual funds before investing.

Related Articles

Mutual Funds Types – Types Based on Asset Class, Structure & Risk

Mutual Funds – What are Mutual Funds & Top 10 Mutual Funds to invest

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Quick Summary

Many Indians are hesitant about investing in mutual funds due to lack of understanding, fear of losing money, and the perception that bank deposits are safer. However, mutual funds are regulated and can provide higher returns. They are tax-efficient and suitable for long-term investment goals. Research and understanding the different types of mutual funds are key before investing.

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