A mutual fund is a means of connecting the aspirations and goals of numerous investors. It serves as a helping hand in achieving their financial goals.
Yet, when individuals decide to invest in a mutual fund, a common question arises: Can a mutual fund go bust?
While stocks and businesses can go bankrupt, it is vital to understand if mutual funds can meet the same fate. Additionally, determining the safety of invested money is equally important.
Can a mutual fund go bust or bankrupt?
The likelihood of mutual funds going bankrupt is quite rare. This is in comparison to the number of bankruptcy cases filed by banks and businesses in the stock market.
Mutual funds are structured in a way that protects investors. Mutual funds do not directly borrow money or take on debt, unlike banks or businesses. This reduces the chances of mutual funds facing financial distress.
Moreover, mutual funds pool money from multiple investors to actively invest in a diversified portfolio of securities. This active diversification helps in reducing the likelihood of a severe financial setback for the fund.
Furthermore, mutual funds are subject to strict regulations and oversight by regulatory authorities. These regulatory authorities actively oversee and enforce strict regulations on mutual funds to ensure responsible management and reduce the risk of bankruptcy.
Additionally, mutual funds are managed by professional investment managers. By implementing various strategies, these managers optimize returns and minimize risks, further reducing the likelihood of bankruptcy.
What are the chances of the failure of a mutual fund?
Even though the chances for a mutual fund to go bust are rare, Asset Management Companies (AMCs) can discontinue certain schemes related to mutual fund investments in certain cases.
AMCs regularly evaluate the performance and viability of their mutual fund schemes. The AMC may consider discontinuing a scheme if it consistently underperforms or fails to attract sufficient investor interest.
Moreover, changes in market conditions or regulatory requirements can also prompt an AMC to discontinue a scheme. For instance, if the investment strategy of a scheme becomes outdated or no longer aligns with the goals of the AMC, they may choose to terminate it.
If there are significant changes in the fund manager responsible for overseeing a particular scheme, the AMC might choose to discontinue it. This could be due to the departure of a skilled fund manager or a strategic decision to consolidate resources.
AMCs can streamline their offerings and focus on core products by discontinuing schemes. This allows them to allocate their resources more efficiently and provide better service by eliminating less popular or redundant schemes.
What will happen if a mutual fund fails?
To close a particular scheme, the Asset Management Company needs to submit a request to the Securities Exchange Board of India (SEBI) which is a regulatory body.
If SEBI grants permission, the trustees of the AMC can then decide to shut down that specific scheme. Additionally, if the fund house fails to comply with the required regulations, SEBI can decide to close an entire AMC or scheme.
When an AMC decides to close a scheme, the investors are given back the money they invested based on the latest Net Asset Value (NAV) of the units. If investors choose to redeem their initial units, the AMC uses its reserves to pay them.
In the case of ongoing liquidity problems caused by a high number of redemptions, the AMC may temporarily suspend buying or selling activities. This suspension remains in effect until the invested units have reached maturity, allowing the return of the money to the investors.
There is a chance for an Asset Management Company to shut down for various reasons. However, if that happens, another company will take over the authority of the collapsed one and continue to operate. Consequently, your money will remain safe in that scenario as well.
Is investment through mobile apps safe?
Mobile apps function as investment platforms and act as brokers to facilitate various investment activities. By using these apps, you can open a mutual fund account, transfer funds and monitor your investments. Importantly, the safety of your money remains unaffected regardless of the platform’s fate.
When you invest in a mutual fund through these apps, your money is directly deposited into the respective mutual fund account. The role of the app is primarily to assist you in tracking your investments.
By visiting the corresponding mutual fund’s website, you can conveniently continue tracking your investments even if these apps shut down.
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A mutual fund acts as a bridge that brings together the hopes and dreams of countless investors. But you should carefully evaluate the scenarios and consult with a financial advisor before investing in mutual funds.
