What are the dark side of mutual funds?
They come with many advantages, such as advanced portfolio management, risk reduction, and dividend reinvestment; however, there are many disadvantages to consider as well, such as high expense ratios and sales charges, tax inefficiencies, and possible management abuses.
Mutual funds provide convenient diversification and professional management through a single investment, but can have high fees, tax inefficiency, and market risk like the underlying securities.
Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Downside risk is a general term for the risk of a loss in an investment, as opposed to the symmetrical likelihood of a loss or gain.
- Returns Not Guaranteed. ...
- General Market Risk. ...
- Security specific risk. ...
- Liquidity risk. ...
- Inflation risk. ...
- Loan Financing Risk. ...
- Risk of Non-Compliance. ...
- Manager's Risk.
As the funds are invested in market instruments, they carry certain stock market risks like volatility, fall in share prices etc., which deters us from investing in mutual funds. As we don't want to lose money, we often let it stagnate in our savings accounts.
Mutual funds are managed and therefore not ideal for investors who would rather have total control over their holdings. Due to rules and regulations, many funds may generate diluted returns, which could limit potential profits.
In the category of market-linked securities, mutual funds are a relatively safe investment. There are risks involved but those can be ascertained by conducting proper due diligence.
Mutual funds may be a good investment for anyone looking for diversification in their portfolios. Learn whether mutual funds can be the right investment for you. Mutual funds offer diversification and convenience at a low cost, but whether to invest in them depends on your individual situation.
Check the Expense Ratio of Funds
The expense ratio is a vital parameter to consider when analysing mutual fund performance. It represents the annual fees and expenses charged by the fund company for managing the fund. A higher expense ratio can significantly impact investment returns over the long term.
One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins. Your financial situation and investment style will determine if they're right for you.
Which is the safest mutual fund?
|Nippon India Arbitrage Fund
|Tata Arbitrage Fund
|Axis Arbitrage Fund
|Aditya Birla Sun Life Arbitrage Fund
Amid the ongoing bull run where Sensex has given over 18 percent return and Nifty50 over 20 percent, small cap mutual funds have given even better returns for obvious reasons. Thanks to the bull run, retail investors in 2023 were considerably incentivised to invest more in equity funds vis-à-vis debt mutual funds.
Most mutual funds are aimed at long-term investors and seek relatively smooth, consistent growth with less volatility than the market as a whole. Historically, mutual funds tend to underperform compared to the market average during bull markets, but they outperform the market average during bear markets.
With advancements in technology, alternative options available to asset owners and wealth managers, and generational differences in how people like to invest, mutual funds' dominant market share will continue to decline.
All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.
|AUM (Rs cr)
|HDFC Mid-Cap Opportunities Fund
|ICICI Prudential Bluechip Fund
|HDFC Flexi Cap Fund
|Flexi cap Fund
|Nippon India Small Cap Fund
|Small cap fund
Usually, closed-ended mutual funds have a lock-in period that can range from a few months to 3-5 years. Open-ended mutual funds except the ELSS instruments are fairly liquid. You can withdraw from a mutual fund scheme anytime after its lock-in period is over.
Index funds and ETFs based on broad-based market indices that follow a passive strategy are also considered to be low risk as they mimic well-diversified market indices. Focused funds, sectoral funds, and thematic funds are at the other end of the risk spectrum because they hold concentrated portfolios.
The best way for that is to opt for SWP or Systematic Withdrawal Plan in a mutual fund scheme. Through SWP, you can withdraw a fixed amount on a monthly or quarterly basis from the investment you have made in any mutual fund scheme.
It is quite possible that your investments are giving negative returns. But it is highly unlikely for the value of a fund portfolio to become zero. While the return on your investment (ROI) can be negative, it is impossible for your investment to become zero.
What happens to mutual funds if the market crashes?
Think of it this way: When the market drops, your mutual fund shares are on sale—you're getting them for a lower price because the market is down. It's the time to buy—not sell.
Mutual fund taxes typically include taxes on dividends and earnings while the investor owns the mutual fund shares, as well as capital gains taxes when the investor sells the mutual fund shares. The tax rate (and in turn the tax on mutual funds) depends on the type of distribution and other factors.
The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs.
|Invesco India Equity & Bond Fund (G)
|Invesco India Growth Opp Fund (G)
|Kotak Select Focus Fund (G)
|Mirae Asset India Equity Fund - Reg (G)
The Bottom Line
Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns.