FAQs on Mutual Funds: Understanding potential risks and returns

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Mutual funds (MFs) provide good investment opportunities to keen investors. Like every other investment option, MFs also involve risks.

MFs are credible investment choices. They come under the regulatory and administrative control of Securities and Exchange Board of India (SEBI).

how is a mutual fund set up?

According to SEBI, “A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company.” All mutual funds are to be registered with SEBI before the launch.

MFs are popular because they provide flexibility and diversification with a range of investment choices.  Broadly, there are three categories of MFs:

Equity Funds

They invest at least 65% of the corpus in equity instruments. Returns on these funds depend on market movement which is influenced by economic and geopolitical events.

Debt Funds

They invest in debt and other fixed income instruments like treasury bills, government bonds and certificate bond. They remain immune to market fluctuations and ideal for risk-averse investors.

Hybrid Funds

They invest both in equity and debt. The aim is to counter balance risk-reward ratio by diversifying the investor portfolio.

What are the potential risks involved?

There are two kinds of risks that affect your investments in MFs:

• Market Risk: Company stocks are affected by market movement which is influenced by factors like politics and economics. This impacts the interests and returns on your investments. Such risks are inevitable.
• Specific Risk: It is limited to a company or industry and can be avoided by maintaining a well-diversified portfolio.

how do I choose a mutual fund?

It depends on your requirement, financial goals and risk tolerance. Do a comparative analysis of various MF schemes available and pick wisely.

Money9 spoke to financial planner and founder of Finsafe Pvt Ltd, Mrin Agarwal in this regard.

What kind of returns should one expect from MFs?

You should expect an average return of 10-12 percent per annum in equities for periods above 10 years.

What are the expenses incurred in a MF scheme?

Expenses to investor are all part of the expense ratio. The expense ratio is charged according to the AUM of the scheme. For equity fund, it ranges between 1-2.25 percent and for debt funds — 0.05-1 percent depending upon the category of the fund.

How often can I withdraw money from Mutual funds?

Mutual funds are liquid and money can be withdrawn at anytime. There may be exit loads applicable for shorter periods.

(Exit load is like a toll tax which is charged when you exit an investment)

What is the benefit of staying invested in the long term?

Investing for the long term helps in getting compounded returns as the interim volatility gets ironed out and the risk of missing out on big gains reduces.