Frequently (Not) Asked Questions - How Safe Is My Money With Mutual Funds?
If you too are amongst those puzzled about what mutual funds do with your money and how safe it remains with them, let us answer some NOT so frequently asked questions on this.
Despite having a wide array of investment categories to cater to all kinds of investors, coupled with both the immense potential as well as history of often outperforming most of the age-old traditional investment options, mutual funds are still something that make us feel dreadful about. Right? One thing that probably holds us back when it comes to stepping into the world of mutual funds and unlocking their benefits, is the constant worry of how ¡®safe¡¯ our invested money is in mutual funds.
If you too are amongst those puzzled about this, let us answer some frequently (not) asked questions on what mutual funds do with your money and how safe it remains with them.
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What do mutual funds do with my money?
Mutual funds are professionally managed investment schemes which pool in money from you and other investors, who may be retail or institutional in nature, and invest it in various securities like stocks, bonds, cash etc. When you buy a unit of a mutual fund, you are purchasing a part of the fund portfolio's value, to be precise. The mutual fund house issues units to the investors in accordance with the quantum of the money invested by them, with the number of units depending upon the NAV at which the units were purchased.
How to know where the mutual fund scheme has invested my money?
Mutual funds are required to disclose their full portfolios of all of their schemes on their website, on a monthly basis. Half yearly portfolio disclosures are published in the newspapers, and may also be sent to the investors (unitholders). The scheme portfolio clearly shows the investments made in each security i.e. equity, money market instruments, debentures, government securities, etc. as well as their quantity, market value and % to NAV. Also, these portfolio statements have to disclose information such as illiquid securities included in the portfolio, investments made in rated and unrated debt securities, NPAs (Non performing assets), etc.
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Who regulates mutual funds? Will they run away with my money?
The Securities and Exchange Board of India (SEBI) regulates all the registered mutual funds in India. Established in 1992, SEBI is the regulatory body for securities and commodity market in India, under the jurisdiction of Ministry of Finance, Government of India.
Besides aiming to promote the development of, and to regulate the securities market, SEBI formulates policies, regulates and supervises mutual funds to protect the interest of the investors. SEBI keeps issuing guidelines through circulars to mutual funds from time to time to protect the interests of investors and make improvements wherever possible. All mutual funds are mandatorily required to be registered with SEBI before they launch any scheme.
What happens to the invested money if the MF shuts down/winds up?
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A mutual fund can usually either be shut down when the trustees of the fund approach SEBI for approval to close it, or if SEBI itself directs the fund to shut/wind up. Whatever the case is, all investors are returned their funds based on the last available net asset value (after adjustment of expenses) before winding up. The mutual funds have to pay a sum based on prevailing NAV after adjustment of expenses and the unitholders are also entitled to receive a report on winding up from the mutual funds which gives all necessary details.
Whom to approach for redressal of my complaints?
In the offer document of the mutual fund scheme, investors can find the name of the contact person whom they may approach in case of any query, complaints or grievances. It is the trustees of a mutual fund who monitor the activities of the mutual fund. The AMC¡¯s trustees and directors¡¯ names are hence, also given in the offer documents. Firstly, the investors should approach the concerned Mutual Fund / Investor Service Centre of the Mutual Fund with their complaints. In case the complaints still remain unresolved, then investors may approach SEBI. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and keeps following up with it regularly for redressal.
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Why are mutual funds considered risky?
Mutual funds are considered risky because they invest your money in securities, whose values tend to keep fluctuating due to dynamic market movements. This makes them risky, as the NAV of the fund also keeps changing as per the individual security values held in the fund¡¯s portfolio. However, since mutual funds invest in diverse securities of different sectors, they diversify the market risk. Such diversification followed by the fund manager helps in reducing the market risk of the fund.
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