Monday, 5 October 2020

IS MY MONEY SAFE IN MUTUAL FUNDs ?

 

One reader asked me about the safety of Mutual funds. 

His questions was like this :

Sir,

πŸ‘‰πŸΌ Is there any security for the capital amount 

 

πŸ‘‰πŸΌ How the money are safe in MF

 

πŸ‘‰πŸΌ Y it's mentioned that MF are subject to market risk.

Regards,
D.B.
Rourkela, Odisha

 

 

 

SRIKANTH MATUBAI replies :
Dear D.B….
Firstly I congratulate for asking the right questions. It's always good to clear doubts about ANY investments for that matter.

Also, I am glad that you asked this question to me than your friend or a layman who knows very little about mutual funds.
Being in the Mutual fund industry for more than 20 years….I can say I have fairly good knowledge about mutual funds!!

No one wants to lose their hard-earned money and I can certainly understand your concern.

Every single investment has Risk

1. Even FD has risk......(Principle risk upwards of 5 lakhs and most importantly, REINVESTMENT RISK)
In fact, REINVESTMENT RISK is the MOST IGNORED RISK. 

2. Land has Risk

3. Gold has Risk

4. Business has Risk

5. Even an employee's fu



ture salary is at Risk. If the company he is working goes bust, the salary is doubtful and its indeed a Risk !!!

Yes. Mutual funds have risk ….Your capital is also at risk

Like any other investment mutual fund too could result in loss.
I am not scaring you but putting out plain facts.


 

 

WHAT DOES SAFE MEAN ?

 

SAFE can mean many things

1.    Capital Protection

2.    Assured Returns

3.    Returns higher than Inflation

4.    Any time liquidity.


So, safety could mean anything and you need to define YOUR safety concern and you will get the answer.

For me personally, SAFETY means not Zero Risk, but those investments which will help me achieve my goals with reasonable risk in reasonable time.  

*IF YOU DO WANT ABSOLUTE SAFETY IN MUTUAL FUND, YOU CAN LOOK AT OVERNIGHT FUNDS*

 

Risk and return go hand in hand.

Want more return, be ready for more risk.....

And risk may not necessarily mean capital erosion......especially in mutual funds, its underlying investments could see WILD SWINGS

 

 

 

 

SAFETY ASPECTS :
Each of the Mutual fund company is registered under SEBI and will be under the watchful eyes of the Regulator and AMFI whose priority is PROTECTION OF INVESTOR'S INTERESTS.

 

 

When you invest any money, the Fund Manager *MANAGES* the money and he is obligated to FOLLOW the already written guidelines for investment and cannot deviate from the same. Failing to do so, they stand to lose their license too.

 

Yes....Some Mutual funds can close down! (Hard Fact) but note the schemes will be either merged or taken over by some other company.

We have seen so many fund houses closing

Lotus Mutual fund

Apple Mutual Fund

Zurich Mutual fund

PINEBRIDGE,

AIG,

DBS Chola,

Morgan Stanley,

 

each of their schemes were either taken over or merged and the investors in these funds were least affected.

 

 

In fact, you will get a detailed report of WHERE exactly your money is invested by these Mutual funds via their Monthly Disclosoures.

 

 

In fact, to help investors, SEBI has put high transparency, stringent disclosure in place.

All funds carry product labeling and have to report Daily NAV and many other regulations in place.

 

 

 

FINALLY,




If you handle an IRON BOX carefully, adjusting the temperatures based on the fabric placed underneath it, it can yield wonderful results. 

But when you fail to abide by its usage instructions the results can be disastrous. You not only risk your clothes being ruined but can also harm yourself. So, is using an iron box safe or unsafe?


 The answer is both!


So....is investing in Mutual funds safe ?


Both !!!!!!

Note, that even your OPERATION by the MOST REPUTED DOCTOR does not guarantee that the operation will be successful.

 

They even take a *declaration* from your family members before the operation that in case the operation fails, the doctor is not responsible !

 

Right ?

 

Likewise....

A disclaimer is given at the bottom of all mutual fund communication to inform investors about the potential risks in investments and hence the need for HAND-HOLDING is paramount.

 

And because Mutual funds, by default, invest in a variety of stocks/bonds,, the diversification is guaranteed which mitigates risks to a large extent and safer than going directly into Direct Equity.

 

 

I would say that Mutual funds gives this disclaimer because they follow the principle of a proverb that says “Better a thousand times careful than once dead”.

 

Most investors tend to believe that Mutual funds invest in Equities.....

Yes, mutual funds do invest in Equities but thats only a part of their allocation.

They also  invest in a wide variety of investments, ranging from Bonds, Gold ETf,  REITs, International Equity, etc.

More than safety, what you should actually try to understand is YOUR APPETITE FOR RISK. Once you understand that, then choosing investment option or asset class will be easier than ever.  

Hope this clears the doubts…
If you still have any clarification, do share in the Comment Box below

 

Regards,

Srikanth Matrubai,

Author – Don’t Retire Rich

 

 



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