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Safety and Guarantees

I am thinking of investing in mutual funds. I am 42 years old and do not have any immediate need to utilise the gains. However, I would like to choose funds that offer more than the bank rate and are absolutely safe.
-A.N. Srivastava

Your dual focus on returns and safety is understandable. However, the phrase 'absolutely safe'--as a lawyer would interpret it--is completely inappropriate to mutual fund investing. In theory, there are no guarantees whatsoever. All your investments are subject to market risk and not even a paisa of it is underwritten by anyone.

Now that we've frightened you enough, we'd like to assure you that in practice there is a risk return continuum along which funds can be placed.

This ranges from funds that are extremely predictable and safe but which yield only a per cent or so more than bank deposits all the way to those which are far more volatile than the stock markets as a whole but are capable of more than doubling your money in a year when things are going right.

At the safest end are the so called ultra short-term funds which typically yield no more than bank deposits but are almost as safe.

These are meant for investments of a few days to weeks. Short-term funds are intended to be slightly higher on the risk-return scale. Diversified equity funds are the mainstream high-risk high-return fund while sectoral equity funds can, supposedly, give higher returns at even higher risk levels.

Needless to say, there are exceptions to this theoretical picture. In particular, medium-term debt funds and gilt funds have abysmal returns currently which are a result of interest rate changes in the economy.