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Avoid ‘assured returns’ trap

india Updated: Nov 10, 2008 20:09 IST
Arnav Pandya

Often there are reports of assured returns on offer, especially in mutual fund schemes, and investors take them to mean regular income without risk. Before jumping headlong at such offers, an investor could do well to step back and access the situation. This will help them understand the actual position and the risk they face.

No assured returns

One of the important factors related to mutual fund schemes is that they cannot offer an assured or a guaranteed return.

They cannot say, ‘We will pay you a certain rate of return against the investment you make’. This is because there were problems with meeting guaranteed returns in the past and this caused a crisis for mutual funds. This is why you will find that various mutual funds do not assure any kind of returns even when the investment of the scheme is in safe instruments that will give regular returns.

Risk for investors

It is important to take a careful look at wordings on the offer document of mutual fund schemes. This will show that intentions about the objectives of the scheme are only stated goals and there is no surety that this will be achieved.

More importantly, a fund does not take any responsibility if goals are not achieved and it will be up to an individual to tackle the position with respect to non-achievement of objectives. Thus, an investor is bearing the risk in the entire process.

Other roles

Often there are reports of big investors offering assured returns. An investor should understand that this is not legal, and a mutual fund cannot undertake this practice.

An investor should not be made to bear the loss of some other investor. There is a need to keep a close watch on developments to know where the scheme is headed. This will help an investor take right steps at the right time and also redeem his investment if the situation is not favourable.