You must have heard about Risks in Mutual Funds and how you can lose money. Yes, there are risks in mutual funds but it’s not like all of them are built the same.
If you are investing in Debt Mutual Funds, your risk of losing money is much lower compared to equity mutual funds. However, your returns are also lower in the range of 6 – 9%.
If you are investing in Equity Mutual Funds, then your risk goes up because the underlying asset is equities. Their values go up and down as per the volatility of the stock market. (See chart below)
This is why it’s recommended that you invest for a long term, with small monthly amounts via a SIP so that you can take advantage of rupee cost averaging (buying when the market is low and when it is high) thereby bringing down your average costs.
Also, over the long term, you can see that the Sensex has delivered an average return of ~16.9% per annum making it one of the best asset classes for growing your money.
To put it in a better perspective, if you had invested Rs 1000 in the index in the year 1991, it would have grown to almost Rs 19,000 in February 2008. However, by December 2008, its value would have come down to almost half at Rs 8000.
If you sold in panic in December 2008, you would have lost 50% from a peak, but if you held it on till 2015, it would have bounced back to Rs 25,000.
Note: The figure above is for the entire index and not for a particular stock. It does not always mean that if you buy a stock and hold it, it WILL grow in the future.
That’s why SIPs in mutual funds are a great risk management tool for growing your money better over a period of time. If your investment timeline is long term or if a significant dip in the market has been identified, lumpsum investments can also give great returns.