Expecting too much from your mutual fund?

Before picking up a fund, this is what I have in mind.

1. Security for my capital. Will my principal investment be safe? Even if the fund does not give me a return, I want my initial investment to be safe.

2. Is there a scheme which offers security for my capital? If yes, then I am willing to settle for a minimum expected return of 24% per annum or 2% per month.

Once I have a scheme with the above guaranteed return, I am willing to take any risk thereafter. And, what is the frequency (monthly/ yearly) at which I will be given the dividend?

- Emmanuel Raj

There are a number of misconceptions we need to clear for you.

You want the expected rate of return to be a minimum of 24% per annum. You will never get such a high rate of return with a guaranteed return investment.

If you want your principal back with a certainty, then you will have to look at Public Provident Fund, National Savings Certificate, post office deposits, bank fixed deposits and RBI bonds. The return will be up to 8% per annum.

There are no mutual funds that offer a guarantee of capital. All mutual funds are subject to market risk. That means, there is no guarantee of returns or even getting your capital back.

Moreover, a fund earns returns in proportion to the risk it takes. The higher the return, the greater the risk to get that return. Equity funds are the riskiest, but they also have the potential to generate maximum returns. Debt funds, on the other hand, are relatively safer, but their returns are lower.

Your return expectations are unrealistic. Expecting 24% per annum with capital safety is out of question.

So, given your need for safety of capital, we suggest that you consider investing in assured return instruments like NSC, PPF and post office schemes. But you will have to tone down your return expectations.

Also, dividends in mutual funds are not guaranteed every month or quarter. Mutual funds are not obliged to make dividend payments at fixed intervals. The decision to declare a dividend is entirely at the discretion of the fund management.

If you are looking at a regular return, you can put a lump sum amount in a post office monthly income scheme. Here, you will get a fixed rate of interest every month.

This interest earned can be invested in a good diversified equity fund. This way, your initial investment will remain intact, while you will also be able to invest in equities.

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