Is Mutual Fund Investment Right for You? Market
Risk – Should You Be Worried?
S. Karthikeyan, Founder - Mentor
WINWORTH, www.winworthwealth.com
&www.propsaleglobal.com
+91 98409 36032
ARN 59199
Is
the warning “Mutual Fund Investments Are Subject to Market Risks” merely a
caution, or does it mean that investors should avoid mutual funds altogether?
Ramesh and
Suresh are friends living in Chennai. Both earn a monthly salary of ₹75,000.
Ramesh has been investing a portion of his income in bank fixed deposits and
gold. Suresh, on the other hand, has been investing part of his income in
mutual funds.
One day,
while watching a mutual fund advertisement on television, Ramesh noticed the
familiar disclaimer: “Mutual
Fund Investments Are Subject to Market Risks. Please Read All Scheme-Related
Documents Carefully.”
Pointing to
the disclaimer, Ramesh asked Suresh, “Why do you invest in mutual funds? What
if you lose your money?”
Suresh
replied, “Just because an investment involves risk, should we avoid investing
altogether? The smart approach is to understand the risks associated with each
investment and invest accordingly.”
Ramesh's
concern is shared by many investors. Is mutual fund investment really a
sensible choice? Should investors be afraid of market risks? Let us understand.
Market Risk
Is Real!
Mutual fund
schemes collect money from investors and invest it in various financial
instruments, including equity shares, debt securities and gold. The value of
these investments can rise or fall depending on market conditions.
Consequently, the Net Asset Value (NAV) of a mutual fund scheme can also
fluctuate.
This is what
is commonly referred to as market risk.
Therefore,
it would be incorrect to say that mutual fund investments are completely
risk-free. However, it is equally important to understand that all mutual fund
schemes do not carry the same level of risk.
Diversification:
An Advantage Over Direct Investment
When an
individual invests directly in the stock market, the investment may be
concentrated in shares of just a few companies. If those companies fail to
perform as expected, the investor's portfolio could suffer significant losses.
In contrast,
equity mutual funds generally invest investors' money across several companies,
helping to diversify the portfolio. Depending on the scheme and its investment
mandate, a fund may hold shares of 30 to 100 or more companies.
This
diversification helps reduce the impact of poor performance by an individual
company. However, it cannot eliminate the overall risk of a market-wide
decline.
Another
important advantage is professional fund management.
Each mutual
fund scheme is managed by a fund manager, supported by a research team that
analyses economic conditions, company performance, financial statements, stock
market trends and debt market developments.
These
professionals play an important role in selecting securities, evaluating
investment opportunities and managing the portfolio.
However, the
presence of an experienced fund manager does not guarantee profits or prevent
losses. Even fundamentally strong companies can witness a fall in their share
prices during a market downturn.
Debt Mutual
Funds Also Carry Risks!
Debt mutual
funds invest in government securities, corporate bonds, treasury bills and
other money market instruments.
There are
two important risks associated with debt funds.
The first is
Credit Risk.
This refers to the possibility that the issuer of a debt security may fail to
pay interest or repay the principal amount on time.
The second
is Interest Rate Risk.
When market interest rates change, the prices of existing debt securities may
also fluctuate. Generally, bond prices fall when interest rates rise and
increase when interest rates decline.
Investing
across different debt securities can help reduce exposure to a particular
issuer. However, diversification cannot eliminate every risk.
Which
Mutual Fund Is Suitable for Which Financial Goal?
One of the
major advantages of mutual funds is the availability of different categories of
schemes to suit investors with varying financial goals, investment horizons and
risk appetites.
|
Mutual
Fund Category |
Investment
Portfolio |
General
Purpose |
|
Liquid Funds |
Short-term debt and money market instruments |
Short-term liquidity requirements |
|
Short-Duration Debt Funds |
Debt securities |
Short- to medium-term financial needs |
|
Hybrid Funds |
A combination of equity and debt |
Medium- and long-term financial goals |
|
Equity Funds |
Shares of companies |
Long-term wealth creation |
|
Gold/Silver Funds |
Gold- and silver-related investments |
Exposure to precious metals |
|
Multi-Asset Allocation Funds |
Equity, debt, gold, silver and other permitted asset
classes |
Diversification across multiple asset classes |
One
important point investors should remember is that liquid funds are not the same
as bank savings accounts. Although they offer relatively easy access to money,
their NAV can fluctuate, and the invested capital is not guaranteed.
Similarly,
investors considering debt funds as an alternative to bank fixed deposits
should understand their associated risks and applicable taxation.
Investment
Opportunities in Gold and Real Estate
Investors
who wish to invest in gold can consider Gold Exchange Traded Funds (Gold ETFs)
and Gold Savings Funds.
These
options provide exposure to gold without the need to purchase and physically
store jewellery. They also help avoid expenses such as jewellery-making
charges, although fund expenses and market-related risks still apply.
For those
interested in real estate, Real Estate Investment Trusts (REITs) and
Infrastructure Investment Trusts (InvITs) offer alternative investment
opportunities.
Through
these instruments, investors can participate in income-generating commercial
real estate and infrastructure assets without directly purchasing land or
buildings.
However, the
market prices of REITs and InvITs can also fluctuate depending on market
conditions, interest rates and the performance of their underlying assets.
Thus, mutual
funds and related market-linked investment products provide opportunities to
diversify across different asset classes.
Can
Long-Term Investing Reduce Risk?
Equity
investments can experience considerable volatility in the short term. However,
investing with long-term financial goals of five, ten or fifteen years provides
an opportunity to ride out temporary market fluctuations.
One popular
approach is the Systematic Investment Plan (SIP).
Through an
SIP, investors contribute a fixed amount at regular intervals. When market
prices are low, the same investment amount purchases more units. When prices
are high, it purchases fewer units.
This
process, known as rupee cost averaging, helps average the purchase cost over
time.
However,
investors should understand that SIPs do not guarantee profits or protect them
from losses. Even long-term investments can generate negative or
lower-than-expected returns, depending on market conditions and fund
performance.
Is Mutual
Fund Investment the Right Choice?
The
suitability of an investment should not be judged solely by the returns it
generates.
Investors
should also consider capital safety, liquidity, taxation, investment horizon
and the ability to generate returns above inflation.
Bank fixed
deposits, gold, equities and real estate each have their own advantages and
limitations. No single investment is suitable for every investor or every
financial situation.
The key
strengths of mutual funds include access to diversified portfolios,
professional fund management, the ability to start investing with relatively
small amounts and the flexibility to choose schemes according to individual
financial goals.
Important
Points Investors Should Remember
Before
investing in mutual funds, investors should assess their financial goals,
investment horizon and risk tolerance.
Money
required for emergencies or immediate expenses should not be exposed to
high-volatility equity funds.
Investors
should not select schemes merely because they have delivered attractive returns
in the past. They should also examine the investment objective, portfolio
composition, expense ratio, risk level and the fund manager's track record.
Rather than
investing in several similar schemes, investors should consider diversifying
their portfolios across different asset classes according to their financial
requirements.
Conclusion
It is true
that mutual fund investments are subject to market risks. However, avoiding
mutual funds simply because they involve risk is not necessarily the right
approach.
The smarter
approach is to understand the risks, choose schemes that match one's financial
goals and investment horizon, and invest in a disciplined manner.
Safety
First... Then Income... Followed by Growth!
By following
this approach, mutual funds can become a useful component of a well-planned,
long-term financial strategy.
For invest and more details contact
S. Karthikeyan, Founder - Mentor
WINWORTH, https://winworthwealth.com/ & www.propsaleglobal.com
OFFICE:
10-B, 1st
Floor, Tharamani 100 Feet Road, Baby Nagar, Velachery, Chennai - 600042
+91 98409
36032 / 044 42180009
Email id: info@winworthwealth.com
ARN
59199
Fellow
Chartered Accountant S. Karthikeyan is the Founder of WINWORTH. Financial
Advisor from the esteemed Asia Pacific region Singapore Financial Services
Associate.
He has visited over 15 nations, some of which are from the US, the UK, Dubai,
Hong Kong, etc. and took part in numerous workshops, primarily on insurance as
a business trip.
He began his profession as a regular person with a strong desire to succeed
constantly. He founded the WINWORTH Company, a wealth solution company, in 1991
with the aim of serving people and ensuring that everyone is a wealthy person.
As a writer and columnist, he is well-known among Tamil readers for his 52-week
Blank Cheque series of articles in Kumudham and his two-week pieces regarding
real estate and loan savings. WINWORTH has offered unfiltered and unbiased
financial guidance to people and companies for more than 30 years.
It is a state-of-the-art financial planning company that looks for the best
ways to enhance your income while guaranteeing you, not just stability but also
luxury.
Our primary goal is "How to make
ten crores in fifteen years of your life ". However, it can't be
finished in a single day. It can only be attained through proper and systematic
methods. Investments and that's the position we take!
Winworth's experience managing the finances of NRI clientele both outside
and in India.
