A mutual fund is not an investment by itself but it is a vehicle to invest in various avenues. Most investments which offer guaranteed returns, do not offer double-digit returns, especially if they are backed by the government. If you are looking for guaranteed returns, mutual funds are not the best investment options. If you have some risk appetite and if you are willing to invest for 10 years, you may consider investing in aggressive hybrid schemes or large cap mutual funds. These schemes have relatively lower risk than other equity mutual fund schemes and they have the potential to offer 10-12% over 10 years. The performance of these investments impacts the returns generated by the mutual fund scheme. So what are the deciding factors here? They are the movement of the specific market in which the money is invested, the performance of individual securities held and the skills of the investment management team.
Given that the returns generated by the markets cannot be guaranteed, the fund takes no guarantee of any return to the unitholders. Most people have this doubt as to why debt or liquid mutual funds cannot give guaranteed returns, even though these funds invest in guaranteed return products like fixed income securities? In order to understand that we need to understand what kind of guarantee we get in case of fixed income products.
You can get guaranteed returns in case of fixed income products only if:
- The issuer is Government of India, which would not default on its commitment towards the Indians. In case of any other issuer, one cannot rule out the possibility of inability to return the investor’s money (credit risk or risk of default).
- A person holds on to the investment till maturity. In case of selling it out before maturity, some instruments have a penalty clause.
- The investment’s maturity exactly matches with our own investment horizon. If your time horizon is longer than the maturity period of your investment, you do not know at what rate of interest you would be able to invest the maturity proceeds.
- You do not take any regular interest payments. The interest payments that you receive need to be reinvested to get the benefit of compound interest. However, it is not possible to predict the rate of interest available when you receive these interest payments.
Fixed income instruments may offer guaranteed returns for the period for which it is issued, given that the entire interest is received on a cumulative basis and the issuer honours the commitment. The other derivation from this is that you do not know how much return you would get over your own lifetime through a portfolio of different fixed income investments. Fixed income mutual funds are portfolios of fixed income securities. Hence, the portfolio’s returns cannot be guaranteed.
Meanwhile, if the mutual fund were still to offer guarantee, it would need to absorb all the fluctuations in the returns it generates and that would require the fund manager to estimate the portfolio return and then keep some margin of error and guarantee the returns. This in turn would mean lower returns due to the margin of safety. It would also mean that the mutual fund carries the risk of default. In case of a mistake by the fund manager, or default by a company that the fund has invested in, the fund would default on its obligations towards the investors. Also, in order to offer guarantee, the mutual fund would need to be close-ended fund. An open-ended fund cannot guarantee returns to an investor, since different investors can come in at different times, as well as get out as per their requirements.
If you are wondering how to invest in a mutual fund, and how to gain access to the best investment options, then you must check out the options available on Finserv MARKETS. You can invest with transparency and interactivity, and receive regular updates on the performance and value of your investments. You also get the option to liquify your mutual fund any time — unless there are specific lock-in periods attached to the plan.
If you are looking to invest in mutual funds with low transaction costs, then mutual funds on Finserv MARKETS could be the place for you. It also offers you the option to divide your funds into smaller parts across different companies so that you make the most out of your investment portfolio. To gain maximum returns with sector-specific funds, it is advisable that you invest in more than one sector. Your funds will be in safe hands with professionals who have expertise in reading and analysing the investment market and helping you gain higher returns on your mutual fund purchases.
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