Are Mutual Funds Safe?

Multiple factors have led to a general lack of trust about them, but do they make sense as an investment option? Read on to find out.

Traditionally, Indians have had the tendency to choose investments that guarantee safety in terms of capital protection as well as fixed returns. This is why, fixed deposits (FD) and recurring deposits (RD) have retained the faith of the Indian investor. Furthermore, FDs and RDs can be done at banks and post offices, which are perceived to be the safest places where one can keep their money.

Mutual funds haven't been able to garner the same kind of trust because many fund companies are not known to the lay investor. Mutual funds have also suffered because of quick-money schemes and chit funds, which have promised high returns but looted investors of their money. It is because of these reasons that mutual funds are not considered to be "safe" investments. However, that is not true.

As far as investments are concerned, safety can be of two types:

• Safety in terms of the company or institution disappearing with your invested money.
• Safety in terms of offering capital protection and guaranteed returns.

No one will run away with your money

For the first type of safety, mutual funds are completely safe. You will not wake up one morning to find out that the fund company you have invested with has run away with your money. That is not going to happen. Mutual fund companies are regulated and supervised by government agencies like the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). The licence to run a mutual fund company is given after as much due diligence as is done while giving banking licences to banks. In short, a mutual fund company is as safe as a bank.

Invest in Mutual Funds to earn higher, tax-efficient returns

Coming to the second type of safety, it is true that mutual funds don't guarantee capital protection or fixed returns. But that is a good thing, because mutual funds would be poor investment products if they did. The purpose of investing in mutual funds is to generate higher returns than what traditional investments offer. Mutual funds are also more tax-efficient that traditional investments. Short-term as well as long-term gains from mutual funds are taxed in a way that it doesn't eat into the returns.

Mutual funds don't guarantee returns, but they still make a lot of sense as long-term investments because the longer you stay invested in them, the more returns you earn. This is because of the power of compounding where your returns also earn returns. Over most long periods, mutual funds have given superior returns that have beaten traditional investments and also been higher than the prevailing rate of inflation. The risk that comes with mutual fund investments can be managed by diversifying your investments.

In a nutshell, mutual funds are safe. Investors should not be worried about losing their money while investing in them. You should just choose the right kind of mutual fund to match your investment goal and invest in it with a long-term view. Just as time heals everything, time also makes mutual funds safe and rewarding.