Mutual funds sahi hai, but when?

The AMFI campaign "Mutual funds sahi hai" is making waves. Many investors are seriously looking at mutual funds. However, what is disturbing about this is that some investors may be coming in mutual funds with unreasonable expectations.

While mutual funds sahi hai, but it is important to understand when. Read my article published in Mid-day Gujarati edition today.

The English translation of the same is as under:

Interest rates have come down in the recent past. This has also impacted the fixed deposits in the banks. With such reduction in the interest rates, many are now looking for alternative investment avenues as their fixed deposits mature. In such a scenario, mutual fund has appealed to many such investors as the investment option of choice. As the industry advertisement goes, “Mutual funds sahi hai!”

However, what is disturbing about this is that some investors may be coming in mutual funds with unreasonable expectations.

There are still many out there, who do not understand what a mutual fund is. It just appears to be yet another investment option, and it can deliver high returns only because it has done so in the past. This is the problem. A lot of mutual fund schemes have, over the long term, delivered returns far in excess of what fixed deposits have done. It is important to understand the schemes before taking a decision solely based on historical returns.

As we have already mentioned earlier, mutual fund is a vehicle that helps you invest in various securities – these could be equity, fixed income, money market or even a commodity like gold. Mutual fund by itself is not an investment avenue, but it is an investment vehicle.

This background is important to understand as some of the investors mentioned earlier are unknowingly shifting their money from fixed deposits to equity mutual funds – thus taking risk they may not be in a position to handle.

Equity has the potential to deliver superior returns in comparison to fixed deposits. However, such returns have come with a lot of ups and downs along the way. Any investor must understand this. In case one needs money when the values are down, you may end up getting less than the amount invested. Even when you may not need money for a long period, seeing your investments losing value for extended periods of time could be hugely challenging.

While mutual funds are good investment vehicles, one must understand what one is getting into and only invest in schemes based on one’s own unique requirements. If you are unable to find the schemes suitable for you, take professional help.