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Mutual Fund Returns are not Guaranteed

Mutual Fund Returns are not Guaranteed

Last week there was shocking news that Flipkart went into a deal with some distributor to get guaranteed returns on Mutual Funds. I can understand if that “guaranteed return” question comes from a layman but not from any big corporate. I don’t want to comment on Flipkart’s CFO..

Mutual Fund Returns are not Guaranteed

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Mutual Fund Basic

Mutual funds are investment vehicles wherein you invest your money in a professionally managed fund that has a portfolio of different underlying assets like stocks, bonds, cash, indexes etc. They collect money from people and institutions and invest in different assets to generate returns for investors. Mutual fund scheme units can be bought at Net Asset Value (NAV) from the Mutual Fund. A fund manager will manage the investment portfolio. Based on investment objective his aim is to maximize returns and minimize risks and to ensure that returns are maximised and risks are minimized. Readwhat are mutual funds

Why Mutual Funds

The layman investor cannot research the whole investment universe nor does he have a huge sum to invest to benefit from huge investment. So if he invests through mutual funds, he can get advantages of size and professional and knowledgeable management and earn dividend and appreciation of capital. ReadBenefits of Mutual Funds

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.

You should expect volatility even in debt mutual funds & liquid funds.

Flipkart expecting guaranteed returns

Recently there was news that one national distributor xyz capital entered into an agreement with online retail giant Flipkart wherein xyz Capital guaranteed returns in the agreement and agreed to make good the shortfall in case the target was not met. The amount earned in excess of the guaranteed returns was to be shared by both companies. The agreement was treated as null and void by both companies when they realised this was against SEBI directives.

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. ReadUnderstanding Mutual Fund with different perspective

Mutual Fund Regulation

SEBI does regulate mutual funds which gives some assurance that the Mutual Fund schemes will be managed in a regulated manner. But one should never forget that Mutual Fund investment involves risk  no matter how wonderful past performance has been and how good the portfolio is or reputed the management is. Checkone of the biggest & oldest mutual fund – 45 times returns in 20 years but no Guarantee 🙂

Why Indians are looking for Guarantee in everything – please share your view in comment section

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  • Anil Kumar Kapila July 2, 2015, 4:45 pm

    Hi Hemant
    When all documents and ads clearly state that mutual fund investments are subject to market risks how can one be so ignorant about the returns.

    Reply
  • Shams July 4, 2015, 10:31 am

    Looks like Flipkart is so overconfident of his recent successes he also started fooling people some time in the name false discount offer and a guaranteed return from MF. How one should be so ignorant Drunk in success that he forgot the basics that “Mutual Funds are subject to market Risk”

    Reply
  • Karan Batra July 4, 2015, 3:36 pm

    Surprisingly, the broker who was helping Flipkart make this investment was also able to sure flipkart of the same and gave them a guarantee of the min. return.

    Not sure whether the broker or the Fund House would have borne the loss in case the assured return had not been delivered….

    But an interesting case though… I wish I had access to the fineprint of the agreement enterred into by Flipkart…

    Reply
  • Neha Sharma October 21, 2015, 4:58 pm

    All mutual funds are comes with warning, but why can people ignore it? BTW it may have not any return fixed, but its sure to get high return in long run.

    Reply