Mutual funds (MFs) are vehicles that pool your money and then collectively invest in equity and debt markets. Different types of schemes come with a varying degree of risks levels from the least risky to very risky funds. But neither of them can assure you returns.
Market-linked: The Securities and Exchange Board of India has banned MFs from assuring any income—dividend or principal—to investors. Here’s why: Prices of equity and debt scrips go up and down, depending on their demand and supply. Your MF scheme’s net asset value that has invested in these scrips also moves, accordingly. Even liquid funds are prone to market swings.
Can quality ensure returns?Good quality equity scrips and high-rated debt scrips limit the chances of your fund’s value going down to zero. However, they too fall in bad markets. In the 2008 market crash, the Nifty index (50 most liquid scrips on the National Stock Exchange) lost 52%. Large-cap funds also lost 53.12% on an average. Quality scrips limit your losses, but they don’t eliminate losses completely.
What about capital protection-oriented funds?These aim to protect, and not guarantee, your money. These are compulsorily closed-end and typically invest in a mix of equity and debt scrips in a way that you get your principal—with some gains from the market—at the end of the term. Usually, these funds have a duration of three to five years.