Which category of funds are the safest and the strongest on performance?
G Radhakrishnan- Chennai
The adage no risk-no return applies to mutual funds as well. Mutual funds are subject to market risks, please read the offer documents carefully before investing is statutory warning that one can hear with mutual fund advertisements and something that most investors miss out reading when filling up offer documents.
There are no funds that can be termed safest when investing in mutual funds. The risks can be high or low, but mutual funds without risk do not exist. You should understand this before you start making investments in mutual funds. As a unit holder, you proportionately own part of the business in which the fund you own has invested in. Market risk is a multidimensional concept that manifests itself in various ways and is reflected in the volatility of the market indicators. Risk is often misunderstood as well, for instance safe investments such as bank deposits also carry risk such as the rate you earn will not exceed the rate of inflation.
For instance, equity funds have the potential to give you the highest returns over a long-term, but carry the maximum risk as they invest in the equity markets and, therefore, are prone to market volatility. On the other hand, liquid funds are the safest amongst all mutual funds, but they invest in securities that mature within a day to three months and, therefore, yield modest returns. Based on your risk perception and the time frame of investments; funds will fall within the safe set with strong or stable performance.
