Three myths about mutual funds you should steer clear of
Investors are often not aware of the kind of risks that are present in these instruments and hence they go out with a mindset that might not be appropriate for the investment.
March 20, 2017 / 01:45 PM IST
There are a lot of terms that are used when dealing with mutual funds and some of the common ones refer to the safety element that is present in the investment. Investors are often not aware of the kind of risks that are present in these instruments and hence they go out with a mindset that might not be appropriate for the investment. This is the reason why one has to be careful especially when describing the features of several types of mutual funds. Here is a detailed look at some of the myths that one associates with mutual funds so that one is aware of the risks present
There is no risk free mutual fund
There are many investors who are lured by the fact that the investment in a mutual fund scheme would not have any risk. This is something that has to be forgotten because every mutual fund investment will have some risk or the other. This will translate into the fact that the investor could end up losing money that they have invested so there is no protection that they would face on this front. Even if the portfolio of the fund consists of government securities where there is no risk of any default there is a chance that if the interest rates move against the fund managers’ views then the value of the fund will decline. This is known as interest rate risk and hence the investor in a government securities or gilt fund is also not protected from the risk. This also means that the investor should take a different approach to the whole issue. When they make an investment in a mutual fund then they should first find out the various risks that are present and which are the ones that they will face. This will help them to frame strategies which can tackle these risks.
There is no guaranteed return
Another thing that many investors look for is guaranteed returns in the investment and while this might be possible for several other debt instruments it will not be possible in mutual funds. Even if there are debt oriented mutual funds then the investor would find that the fund manager will never say that this is the return that the fund will generate because even they do not know what will be the situation going ahead. Everything depends on the market conditions and hence this is something that is not possible to predict. One must also not believe any promises made of assured returns because this is just not possible and hence if one is aware about this then it is possible to remain alert and stay away from inducements to get them to invest in areas which might not be suitable for them.
Hits can be severe
The investor must also be aware of the fact that if there is a hit to the net asset value of the fund then in many cases this might be very severe. This means that if there is a negative development then the fall in the value of the fund could wipe out several months of gains at one go. This is possible though not likely in well managed funds and that is the reason why the investor has to check the portfolio of the fund regularly to see if there is any undue risk that has been taken by the fund manager. There should be a protection from the high risk by choosing funds that are well diversified and have a good track record so this is a crucial aspect otherwise one could find a big hole in the returns if there is a negative development.