Mutual funds are a pool of professionally managed funds that offer active risk management by investing in a diversified portfolio of securities. Fund managers operating mutual funds often have the responsibility of buying / selling securities such that the scheme is able to achieve its investment objective. The investment objective of every mutual fund scheme is to offer maximum returns without causing much threat to the investor’s portfolio. Every mutual fund scheme has a particular benchmark or underlying index which it aims at outperforming at some point of time.
SEBI (Securities and Exchange Board of India), market regulator of securities and commodities in India describes mutual funds as –
a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.
The biggest question lies among new investors is that “Do mutual fund investments offer guaranteed returns?” And it is necessary to address this question immediately as it might create a great amount of confusion and insecurity among those who are planning to start their investment journey through mutual funds.
Be it equity funds or debt funds or gold funds or exchange traded funds, returns from mutual fund investment are subject to market risks. The beauty of mutual fund investments is that they do not offer guaranteed returns. Startled with this statement? But those who have been investing in mutual funds for over five years now will understand the deeper meaning of this. Yes, mutual funds do not offer fixed returns like bank fixed deposits, post office or public provident funds, but they have outperformed each and every one of traditional investment avenues in the past. Those who invested in equity mutual funds for five years or more, such investors have witnessed annual returns to 20 percent and sometime even more depending on market fluctuations. Currently, banks are offering interest rate of 4 to 5 percent on fixed deposits whereas other conservative schemes have an average interest rate of 8 percent to offer. With such low interest rates, it becomes impossible for the individuals to target their life’s long-term financial goals. Whether you are in your early 20s or late 40s, investing in mutual funds depending on your risk appetite is always a good option over conservative schemes. But before investing, it is advisable for investors to assess their financial goals, talk to their financial advisor and then take an informed investment decision.
Mutual funds may not offer guaranteed returns, but you can target your life’s long-term financial goals by starting a monthly SIP in a mutual fund scheme of your choice. Systematic Investment Plan or SIP is an organized way to invest small fixed amounts at regular intervals in a mutual fund scheme of your choice. All investor has to do is ensure that he / she is KYC compliant, decide on the monthly SIP sum and instruct their bank to allow auto debit. After this, every month on a fixed date, the predetermined SIP sum is debited from the investor’s savings account and in quantum with the sum, units are allotted to the investor’s mutual fund portfolio.
To ensure that you are successful to earning wealth through mutual funds, investors are expected to continue SIP investing till their investment objective is achieved. To determine the approximate wealth you can earn, investors can refer to SIP calculator, a free online tool accessible to everyone.
Mutual funds investments are subject to market risks, investors are expected to seek professional consultation before investing.