Can a mutual fund lost all its value?
All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value—even their entire value—if market conditions sour.
It is quite possible that your investments are giving negative returns. But it is highly unlikely for the value of a fund portfolio to become zero. While the return on your investment (ROI) can be negative, it is impossible for your investment to become zero.
The maximum amount of money a mutual fund can lose is theoretically limitless, as the value of the fund's assets can decline to zero. However, it is important to note that mutual funds are diversified investments, which means that they typically hold a variety of securities in order to spread risk.
Technically, NO, a mutual fund cannot go bankrupt. It may trade below market value at some point in time if it is an equity fund and there is a market downturn, or in case of rising interest rates for a long term bond fund.. But one cannot lose all their money.. That's because of the way a mutual fund is structured.
All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.
Mutual fund investment in India is still a smart choice in 2023 for several reasons. Firstly, the Indian economy is expected to grow steadily, providing ample opportunities for investment in various sectors such as infrastructure, healthcare, technology, and consumer goods.
In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.
This decision solely depends on your goals as an investor. Investors can redeem mutual funds in order to liquidate cash for short term goals like buying a car, or going for a vacation or long term goals like investing in real estate, child's education/marriage, retirement, etc.
If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations.
It is possible to lose all of your money in an SIP. However, if you remain invested for a long enough time, the probability of loss becomes zero. Historical data shows that if you stay invested for at least 5 years, even if there are significant market corrections, you are likely to get FD beating returns.
What is the 80% rule for mutual funds?
The 80% investment policy requirement also applies to names suggesting that a fund's distributions are tax exempt. The current Names Rule, however, does not apply to fund names that suggest a particular strategy or policy (e.g., growth or value). As amended, the Names Rule aims to fill this perceived gap.
It's common for a mutual fund to outperform its benchmark over a short time horizon – a few years – as happened with Cathie Wood's ARKK. But new research shows that mutual funds fail dismally when performance is measured over the long horizons that retirement-focused investors face.
Rishabh Parakh, Chief Play Officer, NRP Capitals explains, “SIPs must not be stopped given the market highs and should only be stopped in case there is a change of financial goals or future earnings but market high lows are not in anyone's control.
Choose Bond Funds
Bonds are traditionally considered one of the safer investment vehicles because they provide returns of principal and guaranteed interest payments each year. When it comes to protecting your mutual fund investment from economic unrest, government-issued bonds are even safer than corporate bonds.
“62% SIPs in equity schemes failed to beat their benchmarks in 10-year horizon." “86% mid cap funds fail to beat their benchmarks in 5 years." “Most SIPs in mutual fund schemes fail to beat benchmarks."
Mutual fund companies are well regulated
All mutual fund houses operate under stringent regulations to protect every investor's interests. These regulations are put in place by SEBI (Securities and Exchange Board of India), a government agency responsible for the supervision and functioning of the capital markets.
Mutual funds come with many advantages, such as advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
There is no particular right time to invest in SIP. However, it is always advisable to start as early as possible. Mutual funds generate better returns in the long run. The longer you stay invested the more returns you can earn through capital appreciation and dividends.
What is the average return on mutual funds in 2023?
In the year 2023, something similar took place. While large cap funds, on an average, delivered an annual return of 16.15 percent. Mid cap funds delivered a return of 30.77 percent, and small caps gave the maximum average return of 34.29 per cent.
However, like any other business, Mutual Fund companies and schemes can shut down for a multitude of reasons. Unfortunately, events such as scheme mergers, Mutual Fund House being shut down or sold off cannot be predicted with certainty.
One of the strategies for compounding money through mutual funds is to use the 8-4-3 rule, where the compounding effect grows exponentially. In the initial 8 years, the compounding effect shows good results, but its speed increases in the next 4 years and super-exponentially in the following 3 years.
By comparing against benchmarks, checking expense ratios, studying fund history, analyse mutual fund portfolio strength, examining turnover ratios, comparing maturity periods, and evaluating risk-adjusted returns, you can gain valuable insights into your investments.
Short-term capital gains (assets held 12 months or less) are taxed at your ordinary income tax rate, whereas long-term capital gains (assets held for more than 12 months) are currently subject to federal capital gains tax at a rate of up to 20%.
