Can mutual funds give you the safety of capital?

Mutual funds are linked to the market that’s why they do not guarantee returns nor do they provide safety of capital. Even banks do not provide safety of capital they assure capital safety of upto Rs 5 lakhs only for the fixed deposit. Mutual fund is an organization that collects and pools money from different investors and then invests the money in stocks, short-term debt, bonds etc. The funds collected in mutual funds are handled by money experts who allocate the funds assets and make all the effort to produce capital gains or some amount of income for the investors.

Are mutual funds a safer way?

Anything related to money involves some risks, there is no investment which is the safest and has no relation with risks. Mutual funds do come with a warning saying “Mutual funds are subject to market risks.” Mutual funds are not as safe as the bank deposits but sometimes mutual funds can give you some inflation-beating returns only if you can understand the investment tactics and then invest according to your financial goals. Mutual funds will not run away with your money. You will never encounter any news saying that the mutual funds in which you invested your money has disappeared with your money, such fraud can never happen as mutual funds are supervised and regulated by Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). Every mutual fund house is given a license after full inspection and analysis of their investing techniques and strategies.

Mutual funds do protect capital and preserve wealth

Creating wealth is a synonym of investing. Wealth creation comes hand in hand with short term risks of volatility. The extra money that we keep in our bank accounts or in some other kinds of savings schemes or for some other purposes like for a planned vacation, school fees etc can be invested in some liquid funds. Low volatility in the product returns does help you preserve your capital and you can also earn some amount of returns from the period you have invested your money for. One of the biggest advantage is also that you do not have to set your investment period and you have the flexibility to withdraw money whenever you want to. If you have been investing for a while and you are on the verge of completing your long-term plans then a portion of your portfolio will need some capital safety means you need to preserve the amount of wealth you have created this far. Here you can choose a low-risk fund like a liquid fund option. Sometimes not all funds allocated to liquid funds get fully utilized we sometimes need to move these funds into long term investment options that can increase your return if you want to invest for a longer period of time.

Factors to consider while checking a mutual fund safety

Diverse Funds

If you are keen for higher returns then you can invest in equity securities or in debt funds also. One of the best advices and the profitable advices so far is that while investing one should always invest with a diversified portfolio so that if one industry is not providing good returns other industry might provide some good returns.

Tax Benefits

Mutual funds do offer preferable tax-efficiency in contrast to other traditional investment strategies. The long term or short term gains from mutual funds are taxed in such ways that you don’t have to pay chunks of your returns as tax. There are some mutual funds like the equity -linked savings schemes or ELSS that are specifically designed to cater to tax savings.

Returns

When you invest in traditional investment instruments with zero risks and guaranteed returns, the returns you get are limited and as high as 7% whereas in mutual funds you get capital gains as high as 12% which is nearly the double of what is offered by traditional investment strategies like in fixed deposits or in recurring deposits. Mutual funds allow investors to plan for financial goals like family vacations, children education, new home, retirement plans etc.

To sum up

Mutual funds are safe for long term investment strategies and for people who are looking to create wealth. As a long term investor short term mutual fund fluctuations should not worry you. While making a choice between selection of mutual funds you should choose wisely and make such decisions that match your investment goals and risk appetite and then make a winning choice that helps in wealth generation. One should do a thorough research on different types of mutual fund schemes and their variations, evaluate the market performance, the returns gained and then select a profitable investment decision.

Want to start investment in mutual funds, contact your broker today.