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Are Mutual Funds Safe? Debunking Myths About This Investment Instrument

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By Author: Nirav Singhaniya
Total Articles: 7
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Mutual fund investments remain a popular choice among both new and seasoned investors. The diverse range of mutual funds makes it possible for investors to expand their horizons while mitigating risks simultaneously. However, new investors bear misconceptions regarding mutual funds. There is confusion over how these funds work and if they are safe modes of investments. Here, we provide facts to debunk some of the most common myths about mutual fund investments.

 Myth 1: Mutual funds are unsafe investment instruments because you can lose your money

Amateur investors believe that mutual funds are not safe. The belief stems from the fact that you have to entrust fund management companies and fund managers with your money. There is a fear that the company or fund manager will collect your funds and disappear.

 Fact: SEBI regulations protect your investment

You can have faith that your funds will remain safe, and the company cannot just disappear. SEBI or Securities and Exchange Board of India regulates mutual funds. They have strict reporting requirements with monthly disclosures of financial positions and daily disclosures of net asset value or NAV (the value of each unit of a mutual fund scheme). Such strict guidelines make mutual funds a safe avenue for investment.

 Myth 2: Mutual fund investments are completely risk-free

One of the various myths about investing in mutual funds is their lack of risk. Mutual funds are often viewed as investment instruments that can help you earn a higher return as opposed to other conventional modes of investment. These funds are pitted against bank or post-office fixed or recurring deposits. Many investors think that since these investment instruments can be withdrawn any time, they are entirely risk-free.

 Fact: An element of risk is always associated with mutual funds

Just like any other form of investment, mutual funds run an element of risk. However, the level of risk may vary from one type of fund to another. For instance, debt funds have a lower level of risk since they invest in fixed income instruments like bonds and corporate debt. Equity mutual funds are riskier because they depend on market movements that cannot be predicted fully. Also, fund managers look into mutual funds. Managers invest in a range of instruments depending on the type of funds and their performance over time.

 Myth 3: You need a huge sum of money to invest in mutual funds

Another wrong idea about mutual funds is the amount of money required to invest. Many believe they need a significant amount to invest in such funds. If you have just started earning, your salary may be the right amount to get you through the month. How can you then invest in mutual funds?

 Fact: You can opt for Systematic Investment Plans

You do not need a lump sum amount of ₹5,000, ₹10,000, ₹20,000 or more to invest in mutual funds. If you choose the Systematic Investment Plan or SIP, you can invest in mutual funds in instalments. You can invest as little as ₹500 or ₹1000 per instalment. So, even if you earn a monthly income of ₹20,000, you can devote ₹2,000 to SIP investments every month.

 Myth 4: Higher ranked funds are always better

Some like to put their money into funds that are ranked high. That’s not a bad idea. But, it is no guarantee that your once highly-rated fund will always continue to perform at the optimum level

 Fact: Ranking for a fund changes every quarter, depending on its performance 

When you invest in mutual funds, you need to consider its performance over several periods – maybe one, two or three years. Other factors to look at are the portfolio of the fund and charges (entry and exit charges and expense ratio). If the fund has been providing a consistent return, it is a good investment, notwithstanding the ups and downs.

 Myth 5: Money invested cannot be partially withdrawn

Many also believe that mutual fund investments are not ideal because the partial withdrawal facility is unavailable. It raises concerns over the liquidity of the investment.

 Fact: You can make partial withdrawals

You don’t need to have liquidity concerns while investing in a mutual fund. You can redeem the funds at any point. Depending on your requirement of funds, the investment can be fully or partially withdrawn. If you are unsatisfied with how a fund is performing, you can exit whenever you want.

 Final word: The article addresses your mutual fund investment myths. Mutual funds are highly regulated and extremely liquid instruments. They offer opportunities for good returns. While investing in them is safe, it is not risk-free. Before you make a decision, assess how much risk you are willing to take. High liquidity means that you can pull out your money at any point of time and cash in on short-term gains.

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