As an investor, we invest money with the primary objective of making positive returns through them. Mutual funds are one of the most popular investment vehicles across the globe. It is so very lucrative that it has the magnetic effect of luring more and more investors. Though mutual fund is considered as a safe way of investing for return, the underlying fact is that none of the mutual funds are safe though all mutual funds are safe.
Wondering what this really means?
Well, how safe or unsafe your mutual fund is, depends on how you invest in them.
Consider an electrical equipment like an iron box. If you handle it carefully, adjusting the temperatures based on the fabric placed underneath it, it can yield wonderful results. But when you fail to abide by its usage instructions the results can be disastrous. You not only risk your clothes being ruined but can also harm yourself. So, is using an iron box safe or unsafe? The answer is both!
‘Safe’ is a relative word and has different connotations for different investors.
When you correlate the above example with mutual funds, it reiterates the understanding that all mutual funds are safe if you know what, where and why you are investing in them. Just like adjusting the temperature according to the fabric, you need to realign the asset allocations based on the timeframe of the investment and your growth, return requirement.
If you are new in the mutual fund investing, understand and educate yourself about the different mutual fund schemes suitable for different timeframes. The rationale behind every investment needs to be prudently planned.
SEBI Guidelines on mutual funds:
In an effort to demystify mutual fund investing, and to make the exercise colorful and worthwhile, the SEBI has drafted guidelines on mutual fund product labeling. All mutual fund schemes will have a colour coding – Blue, yellow and brown.
As a practice, mutual fund schemes carry labels which disclose information about the investment objectives, category of the investment and likewise. With the introduction of colour codes, the risk level in the said mutual fund scheme is also transparent to the investor.
Apart from the colour codes, these labels will also indicate whether:
1. It is a scheme for wealth creation or regular income; short term or long term
2. It invests in equity based funds, debt funds, gold or a mix of them.
What do these mutual fund colour codes mean?
The SEBI has played ‘holi’ with mutual funds investing, making the labels colorful and meaningful! Below are the details:
Debt schemes such as debt mutual funds, fixed maturity plan, liquid funds and gilt funds etc. which carry low risk would indicate blue on the label. It is primarily for risk averse investors.
Yellow: Medium risk
Hybrid mutual fund products such as monthly income plans, balanced mutual funds etc., which carry moderate risk, fall under this category.
Brown: High risk
All equity investment schemes such as the diversified equity funds mid-cap and small cap funds, index funds etc. which associate themselves with high risk fall in this colour code. This suits investors who are highly tolerant to risk, and have the long term time frame for their investments.
How does product labeling benefit mutual fund investors?
A traffic signal on the road helps the pedestrian know when he can cross safely and also avoid accidents, similar are the labels designed by SEBI. It helps investors understand how safe or risk prone his investment would be.
One of the main requisites of investors would be to ensure that his capital is not eroded, and the principal amount invested remains safe. Choosing the funds based on the label colour it bears indicates the risk associated with the schemes, thereby educating the investors.
With product labeling, the incidence of investors falling prey to brokers and agents are minimized. All the data about the associated risk is available to the investors and they cannot be misguided by the agents. The stake holder can select his scheme as per his investment time horizon and trade wisely by comprehending the nuances of the pooled funds.
Smoother Investment Journey
Investing is both a science and art. It’s the art of using creativity and judgment to plan financial goals and maximizing returns. The investment journey is a bumpy ride and the science of collecting and analyzing investment data ensures that you don’t lose directions on the way to your destination.
Education, awareness and prudence while investing can ensure that your investment journey with mutual funds can be fruitful and productive.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at firstname.lastname@example.org