The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund's portfolio will have to lose their entire value. However, the returns from a fund can go to zero or even become negative.
Mutual funds are largely a safe and good way for investors to diversify with minimal risk. However, there are situations where a mutual fund is a bad choice for a market participant, especially when it comes to fees. Vanguard, Personal Investors. “Expense Ratios: What They Are and How They Work.”
NAV of Mutual Funds Come Down
When NAV comes down following a crash, so does your investment's worth. Let's understand it with an example. Suppose a fund's NAV before a crash is 50, and you have 1000 units of it. So, the value of your investment is Rs 50,000 (50 X 1000).
This issue can impact their overall performance. For those unaware, a negative cash position occurs when a fund owes more than it owns. This can occur due to two reasons: When there is a time gap between buying/selling securities and when the money actually changes hands.
On the other hand, if you have invested in mutual funds, then I don't see this happening unless the world literally falls apart! However, while the return on your investment (ROI) can be negative, there is no way your investment itself becomes negative – meaning you owe money to someone – that is NOT POSSIBLE.
You can withdraw money from a mutual fund in several ways - via a trading or DEMAT account by selecting the fund and entering the amount to withdraw, through the AMC's website or app, via a broker or distributor, by submitting a form to an RTA branch, or through a bank.
If you are wondering can mutual funds lose money, then the answer is yes as some mutual fund categories are more volatile. This means, while they might offer great returns, they can also offer higher risk. If you feel you are not up for the risk, you should look at the performance of mutual funds from other categories.
In times of economic uncertainty, some investors may turn to mutual funds as a way to protect their capital and potentially generate returns. A low-risk, low-volatility mutual fund is one option that can be explored during a recession.
Funds are liquidated for a variety of reasons, with poor performance ranking as one of the primary causes. Poor performance reduces asset flows, as investors choose not to buy into a fund that isn't doing well. It also brings down the mutual fund management firm's track record.
In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.
If you have money in mutual funds, using some of it to pay off debt, especially debt with high interest rates, might seem like an attractive option. But cashing in your mutual funds isn't always the best way to become debt-free, and, depending on how you hold those funds, you could end up with a big tax bill.
Mutual funds keep a portion of their assets in cash and highly liquid securities. This ensures they can meet redemption requests from investors. The amount held in liquid assets is carefully balanced with the fund's investment objectives.
Upon Reaching Your Goal
For long-term goals, like children's education or retirement, where investment is generally made in equity funds, it's wise to exit a couple of years before and deploy the proceeds in relatively safer instruments like debt funds or fixed deposits.
Can You Live Off of Mutual Funds? Since mutual funds are considered long-term investments and discourage taking profits through trading, living off them probably won't work until you're in retirement and have a large amount of money in them to withdraw over time.
1. Saving Accounts. There's a good chance you already have a savings account. Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad.
Treasurys, says Collins, are similar to government and corporate bonds, as they are backed by the full faith and credit of the U.S. government. They are typically seen as safe investments during a recession. "In times of market volatility, investors may flock toward Treasury bonds, seeking stability," he says.
“Holding cash during times of economic uncertainty, like a potential recession, can feel reassuring because it offers liquidity and a sense of control,” said Adam Paoli, the lead financial planner at Coltiva Wealth.
Since equity mutual funds are market-linked2, they can be volatile. This means if the market goes up, they will generate higher returns, and if the market goes down, it can create chances of loss in mutual funds.
Typically, well managed diversified equity funds have managed to outperform the index over a 5 years period but they have also outperformed other asset classes by a margin when a period of 10 years and above is considered.
Is a mutual fund safe? The safety of a mutual fund depends on the type of assets it holds and the market conditions. For example, a mutual fund that invests primarily in government bonds is generally considered to be safer than one that invests in stocks.
Based on historical analysis, mutual funds have provided solid returns, often around 9 – 12% annually. However, these returns can be higher depending on market conditions. For example, in India, mutual funds have given an average 20% return over ten years and have shown strong market growth.
Most mutual fund distributions are considered taxable investment income. The tax rate depends on factors like the holding duration of the investment within the fund and the nature of the distribution, which could be ordinary income, capital gains, or sometimes tax-free.