Mutual Funds Alert!

Few of my acquaintances who have invested in mutual funds are a worried lot at the moment. Is our investment safe? Do mutual funds still make sense as an investment option?

These were a couple of rapid fire questions from them as multiple factors have led to a general lack of trust about mutual funds.

A few days back, the prospects of debt mutual funds became doubtful and created panic among investors when HDFC and Kotak Mutual Funds’ fixed maturity plans (FMPs) failed to return investors’ entire money on account of delay in repayment by two Essel group companies.

In the past too, investors in various debt schemes have been affected by ratings downgrades of investments, defaults or delay in repayments.

Kotak MF has said the fund house would make part-payment on maturity, and the rest would be paid when there is recovery from its exposure to Essel group, which is expected by September.

HDFC MF has proposed extending the FMPs’ maturity date by another year to April 29, 2020. As things stand, the FMP matured on April 15, 2019.

Amid this scenario, is the fear of mutual fund investors warranted?

Last September, I had deliberated upon the safety of investment in mutual funds and had stated that mutual fund management was facing rough weather and most of the schemes were under-performing.

That time ‘Mutual Fund Sahi Hy’ campaign was being aggressively run by fund managers to woo investors.

Most of the lay investors are into mutual fund investment as they were lured by high returns. Surprisingly, very little was talked about the risk of even losing capital investment while wooing the investors.

For decades, these lay investors banked upon fixed deposit (FD) and recurring deposit (RD) schemes of the banks to earn fixed income on their capital investment and also seek guaranteed safety of their money. It’s pertinent to mention here that banks and post offices continue to be perceived as the safest places where one can keep their money.

Normally, investing money in a bank through schemes like FD and RD lends a comfort to the depositor that the money is safe in the bank as it stands insured and there is no such history on record when depositors’ money was not returned by a bank on demand. On the other hand, investment in mutual funds is not insured.

When we look at the performance of mutual funds, we find these funds haven’t been able to garner the same kind of trust. A lay investor would not like to lose his money and he’s forced to accept the market fluctuation.

Among other things, quick-money schemes and chit funds have taken their toll on mutual funds where investors were looted in the name of high returns.  So, here comes the question of safety of investment in mutual funds.

However, when compared to other investment instruments in the capital market, mutual fund is better option for an investor as far as risk is concerned.

While no investment is 100% risk-free, the investors have to look out for the best-performing mutual funds and for that consulting a financial consultant is the best choice.

So, what matters is choice of platform you would choose to park your money. While looking for hefty returns on your investment, you have to take higher risks. Simply, choice is yours.

It should also be notes that in certain extreme circumstances investor could lose all money. Every mutual fund scheme by virtue of regulations carries a disclaimer notifying that investment can lose value.

This means, any guaranteed protection could fail in the event of a bad market. In other words, any catastrophe can lead to failure of economy, making every investment worthless and wipe out all the money, be it invested in a mutual fund or any other capital market instrument.

One last word, at least bank upon mutual funds which are consistent in performance.  Any short-term scorching performance of a fund should not be taken as a basis for investing in the scheme.

Time horizons for performance review as well as for achieving objectives need to be longer.

(The views are of the author and not that of the institution he works for)