Investment in mutual funds

We have witnessed powerful advertising campaigns (ads) launched by mutual fund companies, promoting the “charm” of Systematic Investment Plans (SIPs). The campaign influences the investment decision of retail investors, causing them to invest almost blindly in mutual funds, mainly through SIP.

Notably, SIP is simply an investment route that causes investors to regularly invest a fixed amount in mutual funds, primarily in equity mutual funds. Here, investors do not need to invest in a lump sum, but they can spread their equity mutual fund investments over a period of time. In fact, the SIP was designed to lure small salaried investors, who basically do not have the financial capacity to invest in lumsump, into the fold of the equity market.

The advertising campaigns present investment in mutual funds, especially through the safe SIP route, as well as the most profitable investment. The impact of these advertising campaigns has been so powerful that the banks’ recurring deposit (RD) scheme is now receiving a moderate response from depositors, as most of their depositors have preferred the SIP scheme over the RD scheme.

However, the safety of investments in mutual funds, especially in SIP carries question marks. Even though the mutual fund industry is growing exponentially as it has managed to attract millions of new raw investors, growth in wealth creation for investors is not guaranteed.

Looking at the market scenario, mutual fund management has recently faced tough weather conditions and most of their programs have underperformed. A report found “about 44% of open-end diversified mutual funds failed to beat their benchmark”. An open-end mutual fund is a fund that is available for sale and purchase on demand at net asset value (NAV). These plans do not have a fixed term.

Normally, investing money in a bank through programs such as RD reassures the depositor that the money is safe in the bank because it is insured and there is no such history when depositors’ money has not been returned by a bank on demand. On the other hand, investment in mutual funds is not guaranteed. We always hear fund managers talk about high returns in mutual fund schemes, but we hardly hear any likelihood of losing the investment from them.

So investing in mutual funds and through the SIP does not guarantee that investors will not lose money. In fact, in some extreme circumstances, investors could lose all their money. Notably, each such plan, under the regulations, has a disclaimer notifying that the investment may lose value. Although mutual funds offer the protection of investing in many stocks, this protection could fail in a bad market.

Some time ago, mutual fund investors were shocked when HDFC and Kotak Mutual Funds Fixed Maturity Plans (FMP) failed to return all of the investors’ money due to the delay in reimbursement of two companies of the Essel group. Also in the past, investors in various debt systems have been affected by downgrades of investment ratings, payment defaults or repayment delays.

When we look at the performance of mutual funds, we find that these funds have not been able to gain the same kind of confidence. A secular investor would not want to lose his money and he is forced to accept market fluctuations. Among other things, quick money schemes and voucher funds have wreaked havoc on mutual funds where investors have been plundered in the name of high returns.

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