First things first, Can you lose money by investing in mutual funds ?
Practically - "No"
Mutual fund, like any other equity market instrument, depends on the market conditions. There is no guarantee that even a fraction of what you invest is 100% safe. So if you want absolute safety, then mutual fund is not for you.. Period.
But let's analyze it a bit more rationally, mutual funds typically hold between 20-80 stocks in their portfolio which are picked by qualified experts. It is possible that one or two of the companies out of the 40 odd companies in which a fund is invested goes bankrupt, but even in such a scenario, the remaining stocks will comfortably cover up the losses for those mishaps. This is a major advantage of mutual funds that their diversification into many stocks protects you from a few bad mistakes.
In the short term, you can definitely incur losses and equity funds are not for you if your investment horizon is less than 3 years. But in the long run it is extremely unlikely that you will incur capital losses. In fact, it is also extremely unlikely that your returns are less than back FD. If you are planning to invest for more than 10 years, you can almost assure yourself that you will be beating the fixed deposit and inflation comfortably. The fact that long term capital gains ( holding period more than 1 year ) are tax exempt, is an icing on the cake. So, there is no absolutely no reason why an aam aadmi should not be investing in a mutual fund. Also, unlike stocks, you don't need to get your fund pick absolutely right in order to earn good returns, you can choose any decent fund from a reputed AMC and you are sorted.
Lastly, investing in a mutual fund via systematic investment plan (SIP), in which a fixed amount is automatically debited from your bank account and invested in your fund, this also tends to increase your savings due to the financial discipline that such automatic investment brings. In the age of automation, it's best to automate your discipline through these SIPs.
So here are the 4 reasons on why you should invest in mutual funds -
- Increases your savings (via SIP)
- Convenient to buy & redeem, High liquidity
- Tax efficient
- Better returns than Gold, fixed deposit etc
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