Mutual Fund Sahi Hai?

Any catastrophic event can make every investment worthless

sajjad bazaz
Srinagar, Publish Date: Sep 25 2018 10:17PM | Updated Date: Sep 25 2018 10:17PM
Mutual Fund Sahi Hai?Representational Pic

Over the past few years, especially after demonetization, one of the most popularized financial products has been the Systematic Investment Plans (SIPs). Mutual Fund companies have been promoting the 'charm' of SIPs through cleverly produced advertisements (ads) run both in print and electronic media, including the social media. Currently, Mutual Fund Sahi Hai campaign is influencing the retail investors' decision luring them to invest almost blindly in mutual funds through SIPs. 

Notably, SIP is simply a route that leads the investors to invest a fixed amount regularly in mutual fund schemes, mostly in equity mutual fund schemes. Here the investors do not need to invest in lumpsum, instead they can stagger their investments in equity mutual fund schemes over a period. Actually, the SIP has been designed to get small  and salaried investors, who basically don't possess financial strength to invest in lumsump, into the fold of equity market. 

Investment in mutual funds especially via SIP route is presented safe as well as most profitable investment through these ad campaigns. The impact has been so powerful that banks' recurring deposit (RD) scheme is receiving mild response from the depositors now, as most of their depositors have been preferring SIP over RD scheme.

If we look at the growth of mutual fund industry in the country, we find a growth of 30% in one year in the assets of the industry. The assets have grown from Rs 16.46 lakh crore in December 2016 to a record Rs 21.37 lakh crore in December 2017. Investors are putting in more than Rs 6,200 crore a month into equity mutual funds via SIPs compared to Rs 1,950 crore in April 2014. (Source Economic Times).

Now the question is about the safety of investment in mutual funds, especially in SIP. Does the growth in the mutual fund industry mean growth in wealth creation for investors'? 

While looking at the market scenario, mutual fund management is facing rough weather and most of their schemes have been under- performing. A report reveals that 'around 44 per cent of the open-ended diversified equity mutual fund schemes have failed to beat their benchmark'. An open-ended mutual fund scheme is one that is available for sale and purchase on demand at net asset value (NAV). These schemes do not have a fixed maturity period. 

Normally, investing money in a bank through schemes like 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. We always hear the fund managers talking of high returns in mutual fund schemes, but hardly we listen any probability of losing the investment from them. 

So investment in mutual funds and through SIP does not guarantee that investors won’t lose money. In fact, in certain extreme circumstances investor could lose all money. Notably, every such scheme by virtue of regulations carries a disclaimer notifying that investment can lose value. While mutual funds offer the protection of investing in many stocks, that protection could fail in the event of a bad market.

In other words, there could be situations causing complete loss scenario. For example, any catastrophic event can lead to failure of economy, making every investment worthless and wipe out all the money invested in a mutual fund, be it SIP also. Another issue is possibility of a fund manager turning dishonest and get involved in embezzling the funds. Then there is also possibility of having an inefficient fund manager. In this situation, a fund could simply be mismanaged and result in loss of investors' money. 

Now, in the given scenario, these small/retail investors need to be careful while choosing a scheme like SIP to board the mutual fund industry platform. They should park their money in such schemes which have been 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.

Meanwhile, investors don’t need to panic every time their mutual fund goes down in value, unless there’s some bad scenario that makes them think their investment is in trouble. Any fund can go down in value temporarily. When there is a drop, investors should immediately look at the scenario to check if there’s something they should be concerned about. Otherwise, that would merely be normal movement of the market.


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



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