Mutual Funds Day 16: No Guaranteed Returns
You might have already heard these words “Mutual Fund investments are subject to market risks, read all scheme related documents carefully.” AMCs and MF houses are supposed to provide this disclaimer in all their mandatory documents as well as advertisements.
Have you ever thought about why this statement is actually required? The answer is that we make financial decisions based on greed or fear and not rationally. We look at historical returns and park money, expecting future returns to be equal to historical returns.
Also, the person selling us the MF or Insurance product may have a sales target and to achieve it, they may falsify the returns or guarantee. The standard disclaimer is provided so that the end customer is not lured into schemes with false promises. Ideally, you should take ample time before investing in any SIPs or MFs.
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger
“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett
Fixed deposits are guaranteed products in the way that they define with certainty what will be your net interest income. Even a Debt MF cannot give you that assurance, this is mainly because the loan that they provide to corporates may be higher or lower than standard rates as per their agreement. The end result is that you as a customer may get a higher or lower yield than a fixed deposit — but the exact amount cannot be quantified.
If you consider the Equity MFs, predicting returns is absolutely impossible. The best a fund manager can do is find good companies and invest a fair amount in each expecting a capital appreciation or dividend income. Again, the exact returns cannot be predicted or assured.
Mutual Funds are pass-through vehicles, if the fund performs well all its investors are rewarded based on their fair share. If the fund underperforms, the loss is also split based on the percentage of capital.
Both Equity and Debt MFs are subject to credit risk & default risk (we will learn these words in a separate chapter). So the chances of losing capital cannot be ruled out.
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