Everyone wants to gain financial freedom. Everyone wants to protect his or her capital and at the same time, earn a high return on it. The greatest challenge faced while considering investment opportunities are the huge number of options we are provided with. This is where Mutual Funds (MF) come in. The recent drive towards Mutual Funds has caused several people to write in and ask us if it is safe to invest in them.
Let’s look at the questions we have received and what makes Mutual Funds stand apart and whether they are indeed safer investment avenues.
1) What is a Mutual Fund?
A Mutual Fund is a professionally managed investment scheme that pools money from several investors and invests in various market securities. To invest in it, you need not possess extensive knowledge about the various stocks in the share market. It is managed by a fund manager and a team of experts who invest the money with an objective of maximising returns.
2) How do I choose a Mutual Fund?
The answer lies on one’s definition of what is safe or what is risky. First, you choose a Mutual Fund based on the performance of the fund, integrity and track record of its fund manager, your risk profile, and your time horizon. In simpler words, think of it as getting into a new relationship: you have to know what you are looking for, what your own personality is, and whether or not you can commit for the long-term.
If you are conservative and don’t want to leave your money invested for long, you should probably not go for equity funds as these tend to be more volatile and go for a debt fund instead. But if you want to maximize your potential returns, don’t mind short term fluctuations and willing to leave your investment for 5-10 years, an equity fund may be best suited for you.
Alternately, if you have more complex needs of multiple financial goals and needs, your investment advisor can also help you create a basket of funds, known as an investment portfolio.
3) Every MF advertisement ends with a disclaimer about them being subject to market risks and reading the scheme related and offer documents carefully.
What does it mean?
Every MF scheme has an investment objective. The nature of securities they invest in depend on the objective. Investments in MF do not ‘guarantee’ capital protection or return. For example, an equity fund invests in various public companies’ shares whereas a debt fund invests in government securities, Certificates of Deposits or corporate bonds. However, all of these securities are traded in the ‘market’ to buy and sell along with other buyers and sellers. So, the entire process of price determination is done by the demand and supply in the ‘market’.
All fundamental information regarding the MF Scheme including the investment objective, fees, investment options, risk factors and mitigation plan, team details etc. are given in the scheme related documents. Basically, it contains all the key Information that an investor must know before investing in the scheme.
4) How do they adhere to what they promise in the Scheme related documents? / How do Mutual Funds ensure safety of my funds? / Is my money safe with a Mutual Fund?
All Mutual Funds in India are regulated by the Securities and Exchange Board of India (SEBI). Mutual Fund regulations clearly define the roles and responsibilities of Asset Management Companies (AMC). SEBI also ensures that all AMCs are supervised by a board of trustees, some of whom, have to necessarily be independent and respected individuals. In the case of discrepancies, there are various penal provisions that are applied on the fund houses. All these safeguards ensure that your funds can never ever be misappropriated and diverted, and that, no one will run away with your money.
5) Can I withdraw my money anytime?
One of the biggest advantages of Mutual Funds is liquidity – the ease of converting your Mutual Fund investment into cash. Most of the Mutual Fund schemes are open-ended schemes and offer withdrawal (redemption) at any time as per investor’s requirement. Once the redemption is complete, funds are transferred to the designated bank account of the investor, within 3 business days after the request is placed.
However two factors need to be kept in mind.
1. There may be an exit load period. In such cases, redemptions before a certain specified period may attract a nominal load e.g. 0.5% of Net Asset Value. Fund Managers impose such loads to discourage short-term investors.
2. Secondly, AMCs may indicate what the minimum amount for redemption is.
6) What happens if a Mutual Fund company shuts down?
In the case of a Mutual Fund company shutting down, the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available Net Asset Value (NAV), before winding up.
In any such case, investors are given an option to exit the schemes and withdraw their money with no penalty or exit load.
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