InvestorQ : What are the unknown facts or risk of investing in Mutual Funds in India?
Kalyani Sundaram made post

What are the unknown facts or risk of investing in Mutual Funds in India?

Shreya Karn answered.
4 years ago

Mutual funds are considered to be the safe option in India as its main aim is to minimize risk by diversification of investment. They pool money from investors, mostly retail investors and professional fund manager with deep knowledge about the market deploy this pooled fund. As a retail investor with less knowledge, most of us rely on the Mutual fund for their financial ability to understand the market and so invest like a pro, that will fetch a higher return possible with minimum or unavoidable This assumption is however not filled by Mutual Funds. Lets us know some of the risk or myth about Mutual Funds

  1. In Mutual Funds, if you opt for dividend mode thinking that it is tax-free, but in actual sense it's not. This is because Mutual fund houses have to pay “dividend distribution tax” on equity schemes and this is deducted from your return and then given to investors.
  2. This will be very shocking for you to know that mutual fund schemes in India mostly mimic their benchmark index. However, a retail investor invest in money considering that the professional fund manager will invest in such a way that fund perform far better than Index, which does not seems to happen.
  3. Since Mutual fund also invests in the stock market which is very volatile, so it requires to short sell as and when required. But in India Mutual Funds are not allowed to short sell thus fund manager cannot react to market when the market is moving down. Under this condition, the only option left with Fund Manager is to keep buying in the market.
  4. If a specific Mutual fund is performing well and invested the right amount in the direct direction, but has some excess cash, then as per SEBI rules the Fund Manager is forced to invest which brings down the NAV of the funds. In such case, a Fund manager cannot do what the fundamental says but go against and push more money some asset.

In such case you should invest in Mutual fund with a specific goal and start understanding the market so that you can redeem or exit as per your requirement and your own decision. This will come only after some specific amount of study investor has done about the market, industry, companies core business, etc.