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Various risks associated with investing in mutual funds

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Reference no: EM133116308

A bank's fixed deposits are meant for conservative investors, who want to deposit a lump sum money for a fixed period, for a minimum period of 15 days to a maximum period of 9 years, thereby earning a high rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit. At times, when the interest rates are rising, fixed deposits offer an attractive yield. Bank fixed deposits are considered to provide high safety for capital as banks are subject to the control of RBI and all deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of India (DICGS).

Mutual Funds as an investment option provide an excellent vehicle for investing. They offer diversification, flexibility, mix of return, liquidity and tax efficiency when compared with other investment option. Investing in Mutual Fund allows an ordinary investor to grow his money in a steady, relatively safe manner. Today, investors have various options to invest their surpluses in various Mutual Fund Schemes like Open-ended, Close-ended, Sectoral Funds, Balanced Funds, Monthly Income Plans, Fixed Maturity Schemes, Gilt Funds, Income Funds, etc. However, investors should take caution while investing in Mutual funds. It must be realized that the performance of a fund varies from time to time; and before investing in Mutual Funds, the investor has to bevaluate all aspects besides the risk associated with investment.

a. Between Bank Fixed Deposits and Mutual Funds, which according to you is a better investment option and why? Give reasons.

b. Is it advisable to invest in Mutual Funds using the "historical return of the fund" as the basis for future investments? Explain your answer.

c. What are the various risks associated with investing in Mutual Funds?

Reference no: EM133116308

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