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Mutual Fund Investment: Safe or Not?

Updated on November 17, 2024 , 54897 views

Generally, Mutual Fund investment is an investment that buys and sells large volumes of securities allowing investors to avail benefits from the lower trading cost. Mutual Funds are of three types- Equity Mutual Funds, debt mutual fund, and Balanced Mutual Funds. Choosing one Mutual Fund investment among these can be daunting for investors. To select the best mutual fund to invest, it is suggested to look for Mutual Fund Performance, Mutual Fund NAV and do a Mutual Fund comparison as well. However, the Volatility and uncertainty of Mutual Funds keep many people away from Investing in them.

Is a Mutual Fund Investment Safe?

1) About Mutual Fund Companies

  • Mutual funds are regulated by Securities and Exchange Board of India (SEBI)
  • Mutual fund companies need a net-worth of 50Cr. to setup.
  • Each mutual fund investment that the mutual fund company brings to investors is approved by SEBI
  • Mutual fund Companies are regularly subject to audits.

Mutual Fund Investment

2) What is the Risk in MF Schemes?

The Mutual fund investment in schemes should be done by assessing one’s risk profile. The risk profile would make an assessment of most aspects of the individual. Above this one needs to understand the intended holding period. To give a basic understanding of how risk changes with various mutual fund schemes.

types-of-mutual-funds

How Does one Understand Risk?

Risk can crudely be equated with the holding period, so like with the above graph, Money market funds may have a very short holding period. (from a couple of days to a month), whereas equity fund would need to have a holding period of more than 3- 5 years. If one assesses their holding period well then a relevant scheme can be chosen with the limited downside in the long run! For e.g. the below table is for mutual fund investment in equity, taking the BSE Sensex as a proxy, one sees with longer holding periods the chance of making a loss decreases.

investing-period

Mutual Fund Investment: Safe Investment Mode?

There are two modes of investing in Mutual Funds - SIP and Lump sum. Though both mutual fund investment modes are chosen by different kinds of investors, however, SIP is the most popular one. So, let’s understand is it safe to invest in Mutual Funds via SIP.

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Is a SIP (Systematic Investment Plan) Safe?

Again, safe is a very relative term. However, there are numerous benefits of SIPs, namely.

Benefits-of-sip

SIP is more of an investing mode, which offers benefits of cost averaging etc. However, in the worst periods of the stock Market, a SIP can also deliver a negative return. For e.g. in the Indian markets if one invested in the Sensex (equity) in September 1994 in a SIP you would have been sitting on negative returns for nearly 4.5 years, however, in the same period, a lump sum investment would have been on negative returns for even longer.

Looking at other countries too, markets have taken 25 years or more to recover (US - Great Depression (1929), Japan - after 1990 has still not recovered). But, given the state of the Indian Economy, a 5-year time period is a very good horizon and you should make money if investing in equity (SIP).

Some of the best performing SIPs are:

FundNAVNet Assets (Cr)Min SIP Investment3 MO (%)6 MO (%)1 YR (%)3 YR (%)5 YR (%)2023 (%)
IDFC Infrastructure Fund Growth ₹50.145
↑ 0.66
₹1,777 100 -101.548.626.629.250.3
Motilal Oswal Multicap 35 Fund Growth ₹59.4739
↑ 0.81
₹12,024 500 4164518.817.331
Franklin Build India Fund Growth ₹136.544
↑ 0.69
₹2,825 500 -4.90.940.526.926.851.1
Invesco India Growth Opportunities Fund Growth ₹90.44
↑ 0.68
₹6,149 100 -0.712.139.419.320.231.6
Principal Emerging Bluechip Fund Growth ₹183.316
↑ 2.03
₹3,124 100 2.913.638.921.919.2
Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 19 Nov 24

To conclude on the safety of a Mutual Fund Investment,

Mutual fund Companies are audited regularly

A SIP (equity) can give a negative return in short periods

With a long holding period (3–5 years +) in equity, one can hope to make positive returns

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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