Investing in mutual funds is a popular concept for individuals in India to grow their money. Managed by expert fund managers, mutual funds offer investors the advantage of a diversified portfolio. This allows the investors to engage in financial markets with ease and reduced risk.
Moreover, the mutual fund industry in India is expected to see significant growth in the coming years. The assets under management (AUM) are projected to surpass the ₹100 lakh crore mark in the next 2-3 years. This highlights the increasing trust and participation in mutual funds as a reliable investment avenue. However, many people find themselves asking - if it is safe to invest in mutual funds or which mutual funds to invest in for the best returns.
The answer is simple - the safety of mutual funds largely depends on several factors, including the type of fund, the quality of the fund management, market conditions, and the investor's risk tolerance. Investors must understand that no investment is entirely risk-free. The key to mitigating risk is to align the choice of mutual funds with your financial goals, investment time, and risk appetite.
Are mutual funds safe to invest in?
Mutual funds gather capital from a diverse group of investors to invest in a broad range of assets, such as stocks and other securities. This pooling of resources allows for a diversified investment portfolio, which spreads risk across different investments. They can be considered a relatively safer investment option, but their safety depends on various factors, such as:
- Market risk: These funds are exposed to market risk. This simply means that the value of mutual funds can fluctuate based on market changes. This is particularly true for equity funds, which invest in stocks that can experience significant price volatility.
- Credit risk: Fixed-income mutual funds, such as debt funds, are subject to credit risk. The safety of these funds depends on the credit quality of the underlying securities. Funds that invest in high-quality and low-risk bonds are generally safer but may offer lower returns compared to those investing in higher-risk and higher-yield securities.
- Interest rate risk: Interest rates keep on fluctuating, which can impact the performance of debt funds. When interest rates fall, the value of bonds may increase, boosting the NAV and vice versa. Investors should be aware of the interest rate environment when choosing debt funds.
- Fund management risk: A mutual fund's performance depends heavily on the fund manager. Poor investment decisions or changes in the management team can negatively affect the fund's returns. It is essential to research the track record and experience of the fund managers before investing.
- Liquidity risk: Liquidity risk refers to the possibility that a mutual fund may not be able to sell its investments quickly enough to meet investors' redemption requests. This can be a concern in funds that invest in less liquid assets. However, most mutual funds in India are structured to ensure sufficient liquidity, reducing this risk.
- Regulatory framework: Mutual funds in India are regulated by the Securities and Exchange Board of India, which sets strict guidelines to protect investors. These regulations include disclosure requirements, limits on expenses, and transparency in fund operations. SEBI's oversight enhances the safety of mutual funds, making them a relatively secure investment option.
Which mutual fund is safe to invest in?
Generally, debt funds that invest in government securities or high-quality corporate bonds are considered safer than equity funds, which are more exposed to market volatility. Moreover, hybrid funds, which combine both equity and debt investments, offer a balanced approach with moderate risk. You can explore mutual funds based on your investment approach here.
Tools that help with mutual fund investments
When investing in mutual funds, utilizing the right tools can enhance your ability to manage and optimize your portfolio. These tools include:
- SIP calculator: The SIP calculator is a tool that helps investors estimate the potential returns of their SIP investments over time. By inputting the investment amount, duration, and expected rate of return, investors can project how much their investment might grow, aiding in goal setting and financial planning.
- Fund comparison tools: Various online platforms offer tools that allow investors to compare different mutual funds based on performance, expense ratio, risk, and other factors. These tools help investors make the right decision by evaluating the historical performance and suitability of funds relative to their investment objectives.
- Fund fact sheets: Fund fact sheets provide detailed information about a mutual fund's portfolio, performance, asset allocation, and other key metrics. Reviewing these fact sheets helps investors understand the fund's investment strategy.
Play safe with the right investment partner
Investing in mutual funds can be a secure and effective strategy for achieving your financial goals. However, investors should also be aware of the associated risks and choose funds that align with their risk tolerance.
You can never avoid risk, but you can partner with a reliable and experienced platform that can guide you through the complexities of the market. Contact Ventura, a trading and investing app, today to start investing and take control of your investments with a platform designed for your financial success.
