Many investors “feel” it is not safe to invest in Mutual Funds and hence they prefer to invest only in Fixed Deposits (FD). Please note….the key point here is “feel”. It is only their feeling that mutual funds are not safe,which of course is not the case.
The investors think FD is 100% safe. However, very few investors know that even if they invent in FD and the bank fails (Any bank..whether it is public sector or private sector) , only Rs.1,00,000/- is guaranteed by RBI. Which in simple terms means, that even a Fixed deposit of One Crore and in case the bank defaults, RBI is liable to pay the investor to a maximum of Rs. 1,00,000/- only.
I would like to discuss Mutual Fund safety in 2 scenarios – Long Term and Short Term
Are Mutual Funds Safe in Short Term?
In Equity Mutual Fund Short Term can be considered as less than 3 years. Since all the money is invested in Stock market, there is some level of risk involved due to dependency on lots of local and global factors like interest rate changes, changes in government policies, change in government etc.
For Example- In January 2008, the Indian stock market was at its peak. People who invested at this time looking at the returns in past years got a shock of their lives in the same year when nifty fell from 6200to 2500. Those investors who invested for t he short term panicked and sold of their balanced portfolio. The Nifty came bank to its previous high levels in the month of November 2010 which is less than 3 years from the time nifty saw its bottom.
It is impossible to time the market.
We should have a minimum of 3-4 years horizon, if you want to invest in Equity Mutual Funds.
Are Mutual Funds Safe in Long Term?
In the past 17 years Nifty (Stock Market) has seen many ups and downs, some minor and some really terrible ones. Despite all these Mutual Funds on an average delivered 15% CAGR returns over the past 18 years. Even if your timing to buy Mutual Funds was horribly wrong (jan 2008) you must have still made 10-12% CAGR returns over the past 9 years.
In the long run it is safe to invest in Equity Mutual Fund. Investors need not panic when the market is in correcting phase (i.e. the bear phase).