Is It Safe to Invest in Mutual Funds Now? Everything You Need to Know
Is It Safe to Invest in Mutual Funds Now: Overview
Mutual funds are preferred by a large number of investors for long-term wealth growth with a fair degree of stability. These investment instruments are often seen as a safe place to put money when compared to direct equity investments. But is a mutual fund safe? If there are risks associated with mutual funds investment, what are they? And how can we mitigate such risks to invest safely in mutual funds? We will answer all these important questions here.
Meaning of Mutual Funds
Before knowing mutual fund is safe or not. You should know what are mutual funds.
Mutual Funds are the pool of funds that are professionally managed by an experienced fund manager. It is a pool of funds consisting of money from different-different investors. Through mutual funds, fund managers allocate the pool of funds to different types of securities like bonds, stocks, and different instruments of the money market. It is a type of investment that is structured in such a way that it can match the objective of the investment in its prospectus.
In the case of mutual funds, huge numbers of investors participate proportionally in the gains and losses of funds. Here small investors can get access to diversified and professionally managed portfolios. In return, there is a charge on mutual funds which is annual fees and commissions to the fund manager.
Features and Advantages of Mutual Funds
Following are the features with advantages of mutual funds:
- Mutual funds beat inflation - As the pool of funds is invested in the market. So, mutual funds are performing as per the market, and in this way, they can beat inflation.
- Expert Managers - The pools of funds are managed by expert managers who have good experience in managing portfolios professionally.
- Convenient - Mutual funds are convenient anyone can invest in mutual funds through their devices.
- Low cost - Expenses incurred in the case of the mutual fund are not so high. There is only a nominal expense ratio and commissions included in the mutual fund.
- Diversification - The funds of mutual funds are invested among different sectors which makes mutual funds a diversified investment.
- Liquidity - If you urgently need a fund, you can easily liquidate your mutual funds.
- Potential Return - Mutual funds give return potentially as per the average return of the market.
- Transparency and safety - Mutual funds give you transparency in your investment. You can check out how much percentage of money is allocated to different sectors and in this way mutual funds provide safety to investors.
Is It Safe to Invest in Mutual Funds Now: What are the Risks?
Following are the risk associated with mutual funds :
- Credit Risk - Where the issuer fails to pay the promised interest of the scheme then it results in the credit risk of mutual fund investment.
- Market risk - It is the most known and common risk in the market. Simply said it is the risk of declining the market. This causes investment to lose its value.
- Liquidity Risk - When it is difficult to redeem an investment from the fund then it is known as liquidity risk.
- Inflation Risk - This occurs when you lose the purchasing power. To make it simple, let's say your mutual gives you a return of 10% but the inflation is 7% so you are left with only 3%.
- Concentration Risk - This occurs when the funds are invested only into one sector. Your funds should be diversified not concentrated.
- Interest Rate Risk - This risk occurs in relation to debt mutual funds. When there is a chance of rising rates and their effect on funds in the market.
How to Invest Safely in Mutual Funds
We should invest safely to reduce the risk attached to any funds, Following are some points which you should remember for investing safely in mutual funds :
- Proper Research - Before investing in any kind of mutual fund you should do your analysis and proper research.
- Understand your Investment plans - You should be well aware of your investment plans before investing in any funds. If you prefer to liquidate quickly you should go for short-term plans. While if you want to stay with the fund for a long term then go for long-term investing.
- Follow diversification - Diversification of funds will help you diversify your amount into different sectors. It can also reduce the concentrated risk attached to your funds.
Is It Safe to Invest in Mutual Funds Now: What are the Benefits?
Types of mutual funds help you identify which mutual funds are safe for you and suit you the best. Following are the types of mutual funds:
- Equity or growth schemes fund - This type of mutual fund is generally invested in equities of the market. Though it is categorized as a risky investment but along with risk there is a high return.
- Sector-specific funds - This type of mutual fund generally invests in a particular sector. It can be banking, pharmaceutical, or technology.
- Fixed income or debt mutual funds - This type of mutual fund is generally invested into debt instruments like Government securities or Government bonds. This is also known as fixed income funds as it gives a fixed return.
- Balanced funds - This type of mutual fund is generally invested in a number of sectors. And so it is known as balanced funds.
- Money Market fund or liquid funds - This type of mutual fund is generally invested into short-term debts and money market instruments which increase the liquidity of the investment.
Why you should invest in mutual funds?
Following are the reason you should invest in mutual funds
- The benefit of starting with a low amount - In the case of a mutual fund, you can start your journey with as low as Rs 500. So it gives the benefit of investing at a low cost.
- Reduction in Tax liability - Not most people are aware that by investing in mutual funds you can saves taxes. If you want to reduce your tax then invest in ELSS fund and then you can reduce your taxable income by Rs 1,50,000 under the Income Tax Act.
- Option of starting with Lumpsum or SIP - This is one of the most important reasons one should invest in a mutual fund. One can start the SIP which is a Systematic Investment Plan with as low as Rs 500 and here you will also get the benefit of starting with a lumpsum amount.
- Cost-Efficient - If you are buying instruments like equity you have to pay charges like Securities Transaction Tax (STT) and the higher the number of equities, the higher the amount will be. But in the case of mutual funds, you enjoy economies of scale because you don't have to pay a bulk amount.
Is it safe to invest in mutual funds?
So it is a conclusion that if you understand mutual funds and if it suits your investment plan then you should go for mutual funds. Yes, it is safe if you take a better understanding of the market and the funds related to it. There is no chance of fraud as it is managed by highly experienced professionals. But yes there is a certain risk attached to a mutual fund which is present in every kind of instrument of the market. Do your proper research and analysis before investing your hard-earned money into any kind of funds, assets, or company.
Is it safe to invest in mutual funds?
Yes, it is safe if you take an understanding of mutual funds. But yes just like other investments, mutual funds also have some sort of risk attached to it.
How to invest in a mutual fund?
You can invest in mutual funds through any online brokerage platform. It doesn't matter whether you have a Demat account or not.
What is SIP in mutual funds?
SIP refers to a Systematic Investment Plan where you can get the benefit of investing a small amount periodically. You can start your SIP with as low as Rs 500.