Mutual Fund Returns are not Guaranteed

Mutual Fund Returns are guaranteed?

It is important to know that mutual funds cannot guarantee returns. Its good or bad performance in the past does not indicate that it will perform in a similar manner in the future. Moreover SEBI does not allow Mutual Funds to guarantee returns from any scheme. SEBI directives also state that even the name of the scheme cannot indicate any guaranteed returns as this might mislead the investors.

There are Capital Protection oriented Mutual Fund schemes in the market. These schemes “aim to protect initial investment” but cannot guarantee returns or capital. The capital is not insured by a third party as well. These schemes invest a major portion of the capital in debt instruments which protects the downside and the higher returns are brought by the capital invested in the equity portion which generally amounts to around 20% of the total investment amount. (works on CAPM model – remember “Highest NAV Guaranteed” schemes that were later banned by SEBI) There will be volatility in returns and these schemes have a tenure of three or five years.

What should the investor do to invest in Mutual Funds?

An investor can compare the performance of a Mutual Fund scheme with those of other mutual funds under the same category (equity, liquid). He/She can also compare the performance schemes with the benchmarks like BSE SENSEX (Sensitive Index), S&P CNX Nifty, etc. Each MF scheme has a benchmark based on investment objective.

He should have a defined investment time frame and investment goals. He should look at the investment objective and check the risk versus rewards ratio. He should then shortlist Mutual Fund schemes that match his needs. He should invest in a diverse set of Mutual Fund schemes that invest in different types of assets so that he gets the benefits of portfolio diversification. He should check the past performance, fund management, portfolio, Mutual Fund performance ratios and then decide the scheme to invest in. But this should be done keeping in mind that returns cannot be guaranteed nor can there be full protection of capital.