"My colleague says his mutual fund gave 18% last year. Will I also get 18%?"
This question comes up every week in our Belong WhatsApp community. The honest answer: No. And anyone who promises otherwise is misleading you.
Mutual funds are not guaranteed or assured return products. This isn't a technicality hidden in fine print. It's the fundamental nature of how mutual funds work.
Every mutual fund advertisement in India must carry the disclaimer: "Mutual fund investments are subject to market risks, read all scheme related documents carefully."
This article explains why guaranteed returns are impossible in mutual funds, what protections you do have, and which alternatives exist if you need assured returns.
Why Mutual Funds Cannot Guarantee Returns
Mutual funds pool money from investors and invest in market-linked securities like stocks, bonds, and government securities.
The value of these securities fluctuates daily based on market conditions.
The fluctuation of your mutual fund investments is contingent upon market conditions, and there is no assurance of positive returns.
When the stocks in an equity fund rise, your NAV rises. When they fall, your NAV falls.
There is no assurance or guarantee to unit holders as to the rate of dividend distribution nor will that dividends be paid regularly.
The schemes are not guaranteed or assured return schemes.
This isn't a flaw in mutual funds. It's by design. The potential for higher returns comes from accepting market risk.
Remove the risk, and you remove the return potential that makes equity investing worthwhile.
👉 Tip: Any advisor promising "guaranteed 15% returns" from mutual funds is either misinformed or misleading you. Walk away.
The Mandatory Disclaimer Explained
You've seen it countless times: "Mutual fund investments are subject to market risks." But what does this actually mean?
It means the value of your investment can go up or down based on market conditions, and there's no guarantee of positive returns.
The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets.
Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.
As the price, value, or interest rate of the securities in which the Scheme invests fluctuates, the value of your investment may go up or down.
This disclaimer isn't marketing language. It's a SEBI-mandated warning that reflects reality.
What SEBI Regulations Actually Protect
While SEBI doesn't guarantee returns, it ensures mutual funds follow strict rules around structure, transparency, and investor protection.
Here's what SEBI actually safeguards:
Your Money's Custody: Your money is held with an independent custodian, not by the fund manager personally. Even if the AMC faces financial trouble, your investments remain protected.
Daily Transparency: NAVs are published daily, and portfolio details are shared regularly so investors know exactly where their money is invested.
Category Compliance: Each fund must follow its stated category. A large-cap fund cannot suddenly invest in small-cap stocks without disclosure.
Risk Disclosure: SEBI requires every scheme to display a riskometer, helping investors understand the level of risk involved from Low to Very High.
These rules do not protect investors from market ups and downs, but they do help prevent fraud, misuse of funds, and lack of transparency.
Compare different fund categories and their risks using our mutual funds tool.
Types of Risk in Mutual Funds
Understanding specific risks helps you make informed decisions:
Market Risk: The most common risk. Stock prices fluctuate based on economic conditions, company performance, and investor sentiment. This affects all equity funds.
Credit Risk: In debt funds, this is the risk of an issuer's inability to meet principal and interest payments. A company defaulting on bonds affects the fund's NAV.
Interest Rate Risk: When RBI raises interest rates, the value of existing bonds may fall. This affects debt funds, money market funds, and balanced funds.
Liquidity Risk: The difficulty in redeeming investments without experiencing a loss in value. This happens when there are no buyers in the market.
Currency Risk: For NRIs, this is significant. If the rupee depreciates against AED or USD, your returns in home currency reduce even if the fund performed well.
Learn more about managing these risks in our guide on mutual fund risks for NRIs.
👉 Tip: Currency risk silently erodes NRI returns. A fund returning 12% in INR might give only 8% in AED after rupee depreciation.
Historical Returns Are Not Future Guarantees
Past performance of mutual funds does not indicate the future performance of the Schemes. This isn't just a disclaimer. Historical data proves it.
A fund that delivered 25% last year might deliver 5% this year or even negative returns.
Market conditions, fund manager decisions, sector rotations, and global events all impact future performance unpredictably.
There is a belief that all mutual funds offer high returns, but the reality is that returns depend on various factors such as type of mutual fund you choose, the tenure and amount of your investment, the prevailing market conditions and various other parameters.
What historical returns do tell you: how a fund performed relative to its benchmark and peers, the fund manager's skill during different market conditions, and the fund's volatility pattern.
Use historical data for comparison, not prediction.
Which Mutual Funds Are Lowest Risk?
While no mutual fund guarantees returns, some categories carry significantly lower risk:
Overnight Funds: Invest in securities maturing within one day. Near-zero risk but returns around 6-6.5% annually.
Liquid Funds: Invest in debt and money market instruments maturing within 91 days. Very low risk with returns around 6.5-7%.
Arbitrage Funds: Exploit price differences between cash and derivatives markets. Low risk with equity taxation benefits. Returns around 7-8%.
These funds won't make you wealthy, but they preserve capital with minimal volatility. They're suitable for parking emergency funds or short-term goals.
Explore low-risk options in our guide on safe investment options for NRIs.
Alternatives That Actually Guarantee Returns
If you need guaranteed returns, mutual funds aren't the answer. Consider these alternatives:
Investment | Returns | Guarantee | Tax for NRIs |
|---|---|---|---|
NRE Fixed Deposits | 6-7.5% | Principal + Interest | Tax-free |
NRO Fixed Deposits | 6-7.5% | Principal + Interest | Taxable at slab |
GIFT City USD FDs | 4.5-5.5% in USD | Principal + Interest | Tax-free |
PPF | 7.1% | Government-backed | Not available for NRIs |
Senior Citizen Savings | 8.2% | Government-backed | Limited NRI eligibility |
GIFT City USD fixed deposits deserve special attention. They offer guaranteed returns in USD, protecting you from rupee depreciation while remaining tax-free under IFSC regulations.
Compare current rates using our NRI FD rates tool and explore GIFT City options.
👉 Tip: For money you absolutely cannot afford to lose, choose guaranteed instruments over mutual funds regardless of lower returns.
The Trade-Off: Guaranteed Returns vs Growth Potential
Here's the reality: guaranteed returns come at a cost.
NRE FDs offer 7% guaranteed. But inflation in India runs at 5-6%. Your real return is barely 1-2%.
Equity mutual funds have delivered 12-15% CAGR over 10+ year periods historically. Even accounting for bad years, long-term equity investors have beaten inflation significantly.
Scenario | Guaranteed FD (7%) | Equity Fund (12% avg) |
|---|---|---|
₹10 lakh for 10 years | ₹19.67 lakhs | ₹31.06 lakhs |
₹10 lakh for 20 years | ₹38.70 lakhs | ₹96.46 lakhs |
The difference compounds dramatically over time. This is why financial advisors recommend a mix of guaranteed and market-linked investments based on your goals and timeline.
Understand the comparison better in our guide on mutual funds vs fixed deposits.
What "Expected Returns" Actually Mean
Fund fact sheets show "expected returns" or historical CAGR. These are not promises.
Expected returns represent what the fund has historically delivered or what similar funds have achieved. They help you set realistic expectations but guarantee nothing.
A 10% return on a mutual fund can be considered good if it aligns with your financial goals and risk tolerance.
However, individual expectations and market conditions play a significant role in determining what is considered satisfactory.
When evaluating funds, look at rolling returns over 3, 5, and 10 years rather than point-to-point returns. This shows consistency across different market conditions.
Track market movements with Gift Nifty for real-time insights.
How to Reduce Risk Without Guarantees
Since mutual funds can't guarantee returns, focus on strategies that reduce risk:
Diversification: Don't put all money in one fund or category. Spread across large-cap, mid-cap, debt, and hybrid funds based on your risk tolerance.
Systematic Investment: SIPs help average out purchase costs over time. When markets fall, your SIP buys more units. When markets rise, your existing units gain value.
Time in Market: Studies demonstrate that the risk of loss on investments undertaken for more than 4-5 years is negligible. Time smooths volatility.
Asset Allocation: Match your portfolio to your goals. Money needed in 2 years shouldn't be in equity funds regardless of potential returns.
Learn about building a balanced portfolio in our guide on how to choose mutual funds.
NRI-Specific Considerations
For UAE-based NRIs, additional factors affect your "effective" returns:
Currency Risk: The rupee has depreciated 3-4% annually against AED over the past decade. A 10% INR return becomes 6-7% in AED terms.
Repatriation Rules: Investments through NRE accounts are fully repatriable. NRO investments have annual limits. Plan your account structure accordingly.
Tax Implications: NRIs face TDS on mutual fund redemptions. Equity funds attract 20% TDS on STCG and 12.5% on LTCG. Plan redemptions to optimize tax.
For those concerned about currency risk, GIFT City mutual funds offer USD-denominated options with different risk-return profiles.
Explore GIFT City Alternative Investment Funds for sophisticated investors.
Red Flags: Spotting False Guarantee Claims
Be wary of anyone claiming:
"This fund will definitely give 15% returns" - No fund can promise specific returns.
"Principal is guaranteed in this mutual fund" - Only specific government schemes guarantee principal, not mutual funds.
"This is like FD but with better returns" - If returns are better than FD with same safety, something doesn't add up.
"Past returns will continue" - Markets don't work that way.
Mutual fund distributors are required to disclose all commissions payable to them. If someone is pushing a specific fund aggressively, ask about their commission structure.
Learn more about selecting trustworthy advisors in our guide on best investment platforms for NRIs.
Key Takeaways
Mutual funds do not and cannot guarantee returns. This is fundamental to their structure as market-linked investments.
What you do get: SEBI regulation ensuring transparency, daily NAV disclosure, professional management, diversification, and historical evidence of long-term wealth creation potential.
What you don't get: guaranteed returns, principal protection, or assured dividend income.
For guaranteed returns, choose NRE/NRO FDs, GIFT City USD deposits, or government-backed schemes. For wealth creation with growth potential, accept that market risk is part of the equation.
Thousands of NRIs discuss these trade-offs daily in our WhatsApp community. Join them for practical insights on balancing safety and growth in your portfolio.
Ready to explore your options? The Belong app helps you compare NRI FD rates, explore mutual fund options, and make informed decisions based on your risk tolerance.
