Risks To Consider Before Investing In MFs

New Delhi, October 21: Your savings won’t grow unless you make an effort to put it into investments. However, you will need a proper financial plan, a quantum of investment required to achieve your financial goals. While most people view savings with banks from the lens of safety, often he or she compromises for low returns for this very sense of security. 

Mutual funds, on the other hand, can get you good returns over a long-term regular investments, but be careful not to jump into the bandwagon without understanding risks and prospects associated with the investments tool. 

“People new to mutual fund often tend to believe that all funds carry the same amount of risk, which is not true. New investors should be aware that they need not take high risk to get returns all the time,” Mukesh Kalra, CEO, ETMoney, says.

Primarily, there are three types of mutual funds: equity mutual funds, which invest in stock markets; debt mutual funds, which invest in bonds; and hybrid mutual funds, which invest in a combination of stocks and bonds. 

“Equity mutual funds are the riskiest as their returns are dependent on the stock markets,” Ankur Choudhary, Co founder and CIO, Goalwise, says. “While in the short term (less than 5 years), the stock markets can give negative overall returns but in the long term they tend to give returns significantly higher than say a bank account or fixed deposits,” he adds.

Financial planners are of the opinion that debt mutual funds are safer than equity mutual funds, as they are not linked to the stock market. However, such it gives lower returns, similar to a fixed deposit investment account, while hybrid mutual funds invest in a combination of stocks and bonds, due to which the risk is balanced.

According to Omkeshwar Singh, Head (Rank MF) of Samco Securities, major risk is when selecting a correct mutual fund category as well as schemes at moderate to high margin of safety.

“One needs to ignore past performance and look at the quality of the portfolio of the scheme that is being considered for the investment. Also ignore big brand or big name as subjectivity is a wrong base for investment. Instead, concentrate on the published TER (total expense ratio) and Turnover ratios to understand fund manager's behaviours in quantitative terms,” Singh says.