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How safe are your mutual fund investments

How safe are your mutual fund investments?

by Holistic 9 Comments | Filed Under: Mutual Funds

Listen to this article


As an investor, we invest money with the primary objective of making positive returns through them. Mutual funds are one of the most popular investment vehicles across the globe. It is very lucrative, and it has the magnetic effect of luring more and more investors. Though the mutual fund considers as a safe way of investing for return, the underlying fact is that none of the mutual funds are safe.

Wondering what this really means?

Well, how safe or unsafe your mutual fund depends on how you invest in them. Read on.

Are mutual funds safe investments?

When it comes to investments, there are two types of safety in general.

1.Safety with reference to mutual fund company absconding with your invested money.

2.Safety of principal and assured returns.

To understand how mutual funds are safe, let us discuss this in detail under 10 different points. 

1. Absconding with your invested money!

Please be 100% assured that a mutual fund company will not run away with your money.

All mutual fund companies are regulated and monitored by SEBI and AMFI. The priority for SEBI is to protect the investor’s interest. Undeniably, India has the strict rules and stringent norms for setting up of Asset Management companies.

There are rigorous prerequisites like experience in the financial market, capital requirements, and past record, to set up a mutual fund company.

If a company applies for a license to run a mutual fund company, it has to go through a detailed due diligence process like licensing process to start a bank.

That means the mutual fund company enjoys the similar amount of safety like banks with regards to the flight risk.

2. Exposed to Scams!

SEBI has set up and implemented clear guiding instructions to all the mutual fund participants – sponsors, trust, AMC, custodians, and distributors. It makes mutual funds a trustable investment option.

The main goal of the board of trustees is to safeguard and secure the investor interest. Minimum two-thirds of the directors need to be independent. Trustees supervise the fund house complying with SEBI guidelines.

It reduces the possibility of minor or major scams in mutual funds.

3. Is my money safe even if the mutual fund is bought by another?

Absolutely, Yes. When a mutual fund company acquires another mutual fund company, it takes over all the schemes. If they would like to shut down any of the acquired schemes, they will return the money to the investors at the prevailing NAV.

4. Is it absolutely safe to invest in Mutual Funds?

As discussed earlier, a mutual fund investor will not lose the invested money by any scams or a mutual fund company flying away with the money or merging with other mutual fund company.

However, the mutual funds don’t guarantee the capital protection and don’t assure the returns. There is a possibility that the mutual funds may generate poor returns or negative returns because of poor performance.
 

Different Types of Risks associated with Mutual Funds

 a) Market Risk:

This risk is applicable to both equity funds and debt funds. If the stock market or debt market is not doing well, it will affect the performance of equity funds and debt funds.

An investor can secure himself to some extent from market risk by diversifying your investments in different markets and also choosing to stay in the market for the long term.

b) Liquidity Risk:

Even this is applicable to equity funds and debt funds. If the stock or debt market instrument in which the mutual fund has invested is not getting traded in the market, then it will be difficult for the mutual fund to liquidate that security.

You can safeguard yourself from the liquidity risk by diligently selecting the mutual funds to invest.

c) Credit Risk:

This risk is applicable to debt funds. If the underlying security issue is not able to repay, it is known as credit risk or default risk.

As a safety measure, you can analyse the credit ratings of the underlying securities and reduce the credit risk.

d) Interest Rate Risk:

This risk is also applicable to debt funds. When the interest rate goes up, the value of fixed income instruments will fall down. You can safely control the interest rate risk by choosing the accrual-based debt funds and avoiding duration based funds.

5. Can I lose all my money in mutual funds?

We have different types of risks associated with mutual funds; you may ask “Can I lose all my invested money in a mutual fund?”

The mutual funds invest in different stocks and debt instruments of different companies, the possibility of all the companies will fail is extremely less. So, the possibility of you losing all your invested money in the mutual fund is really remote.

However, if the entire economy fails, then all the companies in the economy will also fail.

6. Is Mutual Fund SIP Safe?

SIP will reduce the risk by investing in the market in a staggered way. It restricts you from entering at the very peak of the market. As you invest monthly or some periodically your investment cost will be averaged out.

However, it doesn’t mean that your Mutual Fund SIP is 100% safe. It also carries all the 4 risks which we have discussed earlier.

7. How safe are debt funds?

Debt funds are comparatively safer to equity funds. Debt funds invest their money in the fixed income yielding instruments. As discussed earlier, debt funds have credit risk and interest rate risk.

  • Check the portfolio and analyse the credit ratings of the securities.
  •  Choose accrual based debt funds and avoid duration based debt funds.
  •  Choose the debt funds whose Average maturity is closer to your investment time horizon.

If you follow the above safety measures, then your debt funds will be a better alternative to fixed deposits.

8. Additional Safety quotient:

There are few other features of mutual funds that increase the safety quotient of mutual fund investments.

a. Diversification:

The fund houses are investing your money in multiple securities. Even if one security incurs a loss, that can compensate for other performing securities.

b.  Professionally managed:

The mutual funds managed by professional fund managers; they will work towards reducing the market risk, credit risk, liquidity risk and interest rate risk.

c.  Transparency:

The Mutual funds need to be transparent in disclosing their portfolio periodically by the regulations. This transparent fund management system and daily NAV disclosure add more safety to mutual fund investments.

d. Liquidity:

Mutual fund investments are highly liquid. All open-ended mutual fund units can be sold back to the mutual fund itself. You can convert your mutual fund investments into cash at anytime. It is a unique feature of a mutual fund. Other investments like real estate are highly illiquid.

9.  Is it safe to invest in mutual funds online?

You will be sharing the personal and financial information when you are investing in online. How are this information kept confidentially? Is there a possibility that someone can take advantage of and exploit the data?

The answer is NO because all online platforms follow the required encryption protocols to secure your data.

Online platforms are as safe as offline investments. It provides more convenience for an investor.

10.  How to be safe with Mutual Funds?

Consider electrical equipment like an iron box. If you handle it carefully, adjusting the temperatures based on the fabric, it can yield wonderful results, but when you fail to abide by its usage instructions the results can be disastrous. You not only risk your clothes being ruined but can also harm yourself. So, is using an iron box safe or unsafe? The answer is both!

‘Safe’ is a relative word and has different connotations for different investors.

When you correlate the above example with mutual funds, it reiterates the understanding that all mutual funds are safe, if you know what, where and why you are investing in them. Just like adjusting the temperature according to the fabric, you need to realign the asset allocations based on the timeframe of the investment and your growth, return requirement.

If you are new in the mutual fund investing, understand and educate yourself about the different mutual fund schemes suitable for different timeframes. The rationale behind every investment needs to be prudently planned.

Safety and SEBI colour-code Guidelines on mutual funds

In an effort to demystify mutual fund investing, and to make the exercise colourful and to worthwhile, the SEBI has drafted guidelines on mutual fund product labelling. All mutual fund schemes will have a colour coding – Blue, yellow, and brown.

As a practice, mutual fund schemes carry labels which disclose information about the investment objectives, the category of the investment and likewise. With the introduction of colour codes, the risk level in the said mutual fund scheme is also transparent to the investor.

Apart from the colour codes, these labels will also indicate whether:

  1. It is a scheme for wealth creation  or regular income; short-term or long-term
  2. It invests in equity-based funds, debt funds, gold or a mix of them.

What do these mutual fund colour codes mean?

 
The SEBI has played ‘holi’ with mutual funds investing, making the labels colourful and meaningful!

Below are the details:

Blue: Low risk

Debt schemes such as debt mutual funds, fixed maturity plan, liquid funds and gilt funds etc. which carry low risk would indicate blue on the label. It is primarily for risk-averse investors.

 Yellow: Medium risk

Hybrid mutual fund products such as monthly income plans, balanced mutual funds etc., which carry moderate risk, fall under this category.

Brown: High risk

All equity investment schemes such as the diversified equity funds, mid-cap and small-cap funds, and index funds etc. which associate themselves with high-risk fall in this colour code. It suits to the investors who are highly tolerant of risk and have the long-term time frame for their investments.

How does product labelling benefit mutual fund investors?

A traffic signal on the road helps the pedestrian know when he can cross safely, and also avoid accidents, similar are the labels designed by SEBI. It helps investors understand how safe or risk-prone his investment would be.

One of the main requisites of investors would be to ensure that his capital does not erode, and the principal amount invested remains safe. Choosing the funds based on the label colour indicates the risk associated with the schemes, thereby educating the investors.

  • With product labelling, the incidence of investors falling prey to brokers and agents are
  • All the data about the associated risk is available to the investors and they cannot be misguided by the agents.
  • The stakeholder can select his scheme as per his investment time horizon and trade wisely by comprehending the nuances of the pooled funds.

Smoother Investment Journey

Investing is both a science and art. It’s the art of using creativity and judgment to plan financial goals and maximizing returns. The investment journey is a bumpy ride, and the science of collecting and analysing investment data ensures that you don’t lose directions on the way to your destination.

Education, awareness, and prudence while investing can ensure that your investment journey with mutual funds can be fruitful and productive.

Hope the above points could have given you a right perspective about mutual funds.

If you have any comments or questions, write them in the comment box below.

Or are you interested in creating a Comprehensive Financial Plan for your financial goals?

Skip the queue by registering for your 30 Minute FREE Financial Plan Consultation. Click the ‘‘BOOK YOUR SLOT NOW!’’ button below. 

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Comments

  1. S De says

    July 5, 2020 at 12:55 am

    Hi, I am 29 years Male (yet to be married, have a home loan of 27L of 30 yrs) and want to invest in SIP (systematic investment plan). I don’t have much knowledge around these. I want to invest in 2 ways – 60-70% of investment in low-risk SIP (for my long term financial goal 12-20 years) & 30-40% of investment in medium-risk SIP (for my short term financial goal of 4-5 years).
    What instruments should I choose? Kindly advise.
    I see you also provide financial advise online, would love to get in touch with your team – based on clarification to my above questions. Thanks for understanding.

    Reply
    • Holistic says

      September 26, 2022 at 5:40 pm

      Hi,
      For personalised investment plan you can take advantage of our free complimentary financial plan consultation and talk to our financial planners.
      Get your appointment here: https://www.holisticinvestment.in/complimentary-financial-plan-consultation/

      Reply
  2. Leonel says

    September 9, 2018 at 2:24 pm

    Thanks to the excellent guide

    Reply
  3. Suryakant says

    January 16, 2018 at 12:22 pm

    Thank you.

    Reply
  4. Premalatha says

    January 5, 2018 at 5:16 pm

    Thanks for the info.

    Reply
  5. Pinalkumar m Thakkar says

    September 18, 2017 at 10:11 pm

    What can average returns be given by balanced fund in year

    Reply
    • holistic says

      September 28, 2017 at 2:46 pm

      Dear Pinal Kumar,

      Balanced Funds can deliver around 10% year on year on an average. Depends on the market returns in one particular year the returns may be more or less. But in the long run, we can expect around 10% from balanced funds.

      Ramalingam

      Reply
  6. RÇ Goyal says

    August 24, 2017 at 12:28 pm

    I am a senior citizen. I want to invest my funds to give me returns more than FDs, no tax liability and totally safe.

    Reply
    • holistic says

      August 26, 2017 at 3:29 pm

      Dear RC Goyal,

      There is nor Risk Free + Tax Free investment except PPF.

      Other investments come with some amount of risk.

      There is a lesser risk + lesser tax liability investment which is debt fund. Depnding on your time frame of investment, you can choose an accrual based fund with the right average maturity.

      Regards
      Ramalingam

      Reply

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Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
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I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
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I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

Google Reviews

Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

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