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Are Mutual Funds Safe?

Are Mutual Funds Safe?

Mutual fund investments are very popular among investors due to surety of returns. But, are mutual funds safe investments? In this article we shall talk more on this issue in detail.
Charlie S
Mutual fund investments are recommended by several investment analysts for building a solid investment portfolio. Though mutual funds originated long back, they are still the most preferred forms of investments due to many reasons. However, as we know, there are some risks associated with every investment, and it is taken for granted that the investor is completely aware of them before investing. The same holds true for the mutual fund investments also. While signing up with any mutual fund company, you are given a document which has disclaimer clauses and a statement like-"Mutual fund investments are subject to market risks. So, please read the prospectus carefully before investing". At this point, a common investor gets confused as of where his money would be safe. However, my point is that one should choose an option which is less risky as compared to the other options.

Types of Mutual Funds

In a mutual fund, we invest money on a monthly basis in our selected scheme. The following are the kinds of funds which we get to select from:
  • Large cap funds
  • Mid cap funds
  • Small cap funds
  • Diversified funds
  • Sector specific funds
However, in spite of the variety available, the question are mutual funds safer than stocks arises, because mutual fund companies will ultimately be investing the money into select stocks which they decide after a good research. Many people fear that in times of stock market crash, their mutual fund asset value too will go down. Though this is true, you also tend to gain when the market rises and this can help you recover from past losses. Funds are invested by fund managers who are responsible for professionally managing these funds. As they say, knowledge is the king in the stock markets and hence profound knowledge of capital markets can be a way of wealth creation.

When a retail investor buys stocks, he might not be aware of the risks associated with it, as he is not in touch with the happenings in the markets on a daily basis. However, finance professionals who manage mutual funds have industry knowledge and exposure which helps them to make the right 'buy' and 'sell' calls to protect and increase investor wealth. Thus, the answer to the question are mutual funds safe is a YES in most cases.

Exchange traded funds (ETF's) are nothing but mutual funds that are traded on the stock exchange. ETF's have also emerged as good investment options over the years. However, if you wish to know whether mutual funds are safer than ETF's, then considering the track record of the mutual fund company, its history of returns and ability of fund managers is important. Though most funds are well managed, some poorly managed funds do exist in the market, and they can deteriorate your wealth. So, you should track the performance of a fund for the past few years and go for the one which shows maximum consistency and pays good dividends. Another point, which I would like to discuss at this point, is that you need to buy mutual funds with a long term investment outlook. If you close your fund earlier, then you might not get the desired returns.

Top Mutual Funds

After knowing that mutual funds are relatively safe, here's a list of best mutual funds to invest in:
  • Primecap Odyssey Growth
  • T. Rowe Price Emerging Markets
  • FPA Crescent
  • Fidelity Contrafund
  • Oakmark International
  • Vanguard Wellington
So we can conclude that mutual funds are the relatively safer option in terms of financial investments. One must definitely consider this form of investment after a careful research. A mutual fund scheme of fifteen to twenty years would be the ideal for youngsters who have just started earning. So, hoping that you will use the above information well, I would like to sign off here. Good luck!

DISCLAIMER: This article is just for reference purposes and does not recommend any investments.