1. Mutual Funds: Is the fear warranted?
Traditionally, Indians have had the tendency to choose investments that guarantee safety in terms of capital protection as well as fixed returns. This is why fixed deposits (FD) and recurring deposits (RD) have retained the faith of the Indian investor.
Furthermore, FDs and RDs can be done at banks and post offices, which are perceived to be the safest places where one can keep their money.
Mutual funds haven’t been able to garner the same kind of trust because many fund companies are not known to the lay investor. Mutual funds have also suffered because of quick-money schemes and chit funds, which have promised high returns but looted investors of their money. It is because of these reasons that mutual funds are not considered to be “safe” investments. However, that is not true.
2. So, are Mutual Funds really safe?
As far as investments are concerned, safety can be ascertained in two ways:
a. Safety in terms of the company or institution disappearing with your invested money
b. Safety in terms of offering capital protection and guaranteed returns
While no investment is 100% risk-free, our experts at ClearTax handpick only the best-performing Mutual Funds for our platform so that when you invest in them, you get the best value for your money. However, what you really need to know before making an investment is this:
a. No one will run away with your money!
If you are worried about flight risk then rest assured because mutual funds are completely safe. You will not wake up one morning to find out that the fund company you have invested with has run away with your money. That is not going to happen!
How can we assure you this? Because Mutual Fund companies are regulated and supervised by government agencies like the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). 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 as low as can possibly be.
b. Mutual Funds are meant for earning higher, tax-efficient returns
Coming to the second type of safety, it is true that Mutual Funds don’t guarantee capital protection or fixed returns. But 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 generate higher returns than what traditional investments offer. 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.
This is why, Mutual Funds don’t guarantee returns, but they still make a lot of sense as long-term investments because the longer you stay invested in them, the more returns you earn. This is because of the power of compounding where your returns also earn returns. Over most 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 losing their money while investing in them. You should just choose the right kind of mutual fund to match your investment goal and invest in it with a long-term view. Just as time heals everything, time also makes mutual funds safe and rewarding!
Before you invest though, it is always wiser to do your research and read more about Mutual Funds in general. Different funds will give you different returns based on their market performance and their historical graph. You can look up the Value Research Rating guide which ranks the top-performing Mutual Funds every year and takes your pick. Or, you can invest through ClearTax’s online platform which assures you a portfolio based on your needs.
If you need help, remember that we have your back. You can choose to speak to our experts and learn all about Mutual Funds before pledging your money.