Are mutual funds a good investment? Common worries and real drawbacks

Mutual funds can be a sensible way to invest for goals several years away. But they carry real risks and costs, and they do not suit money you will need soon. What decides it is what the money is for and when you will need it. It also depends on how big a fall you can sit through without selling.

SEBI, the market regulator, ran an investor survey in 2025. Of the households it asked, 63% knew of at least one market investment, but only 9.5% held any. These figures cover shares, mutual funds and other market products together, not mutual funds alone. Among non-investors in that all-products survey, the most common single reason for staying out was fear of losing money (34%). Next in that survey came not knowing how the products work (28%) and not knowing how to start (27%).

Are mutual funds a good investment?

It depends on the job the money has to do. A mutual fund pools money from many people and a professional manager invests it under SEBI's rules. Each unit you own is a slice of everything the fund holds, so its value rises and falls with the market.

That makes a fund useful for owning a spread of shares or bonds without buying each one yourself. It does not make the fund safe from losses. SEBI's Investor Charter tells investors not to fall for the promise of assured returns.

Funds tend to suit money meant for goals years away, held by someone who can leave it alone through a fall. They suit money needed soon much less, and the same goes for someone who would sell in a panic.

Why do people avoid mutual funds?

The reasons come down to fear of losing money and distrust of fund houses. Two more are the feeling that you need expertise or a large sum, and worry about costs. A fund house (also called an asset management company) is the company that runs the fund. In the same all-products survey, 26% of non-investors cited cost. Many of them thought a large amount was needed to begin.

Can you lose money in a mutual fund?

Yes. The NAV can fall below what you paid, and no rule protects the amount you put in. For example, if you put ₹50,000 in and the fund falls 25%, it is worth ₹37,500 for a while. That example is made up, not a past result.

Every fund also carries a riskometer, SEBI's risk label, with six levels from Low to Very High. There is no "no risk" level, so even a Low reading means some risk. A fund holding only shares, which are part-ownership of companies, reads High at best, and usually Very High.

Deposit insurance covers bank deposits, not mutual funds.

Two things limit the damage. No rule lets a fund ask you for more money, so the most you can lose is what you put in. And a scheme can put at most 10% of its NAV into one company's shares. Index funds and exchange-traded funds (ETFs) are among the exceptions. Both copy an index, a list of companies picked by fixed rules.

Koshex's own suggestion, not a SEBI rule, is five years or more for a fund that holds only shares. Koshex talks you through sharp market falls before you redeem (sell). For a dated example of a fall, read is a SIP safe.

Can a fund house run away with your money?

No. Your money goes straight from your bank account into the scheme's own account, and SEBI's rules say distributors and platforms may not pool it on the way. A trustee company holds the fund's assets for investors, and a separate custodian keeps the securities.

The fund house manages your money; it does not own it. The trustees can, with SEBI's approval, end its appointment and name another. If the fund house changes hands, investors must be offered an exit at the prevailing NAV with no exit load. An exit load is a fee some funds charge if you sell within a set time.

If a scheme is closed, its holdings are sold and the money is paid out in proportion to units held. Debt means loans to governments, banks or companies, held as bonds. That is how six debt schemes of one fund house were wound up in 2020, and investors could not redeem for over ten months.

Your units are not held by the app you invested through, so an app closing does not take them with it. Can a mutual fund drop to zero tells the whole story.

Do you need to be an expert, or rich, to invest?

No. SEBI sets no minimum investment. Each fund sets its own and prints it in its scheme documents. One fund's document shows a SIP of ₹100, and another asks ₹10,000 for a one-time investment.

Every fund must show a label saying what it is for, how long to hold it and how risky it is. SEBI sorts funds into categories so that similar funds look alike.

Debt, hybrid and gold funds exist too, and the mutual funds guide explains the types. Koshex helps you choose a fund that suits your goal and timeline.

Do the costs eat up your returns?

Costs are real and come out every year, but SEBI caps them and there is no entry load, meaning no fee for buying in. The expense ratio is the fund's yearly fee, shown as a percentage of your money and taken out of the fund's value.

SEBI lists its parts: the base expense ratio, brokerage, the cost of executing trades, and statutory levies including GST. Take an equity fund, one that invests in shares, whose manager picks the holdings. Its base expense ratio can be at most 2.10% on its first ₹500 crore of assets. The cap slides to 0.95% on the balance.

At 2.10%, ₹50,000 bears at most ₹1,050 a year in base expenses. A larger fund's cap is lower. Brokerage, transaction costs and GST come on top, within SEBI's limits. This is a ceiling, not any fund's actual ratio.

The exit load of an open-ended scheme cannot exceed 3% of NAV. Both the expense ratio and the exit load belong to the scheme. Koshex charges investors no platform or transaction fee, but the scheme's own costs still apply. Read more in the expense ratio explained, mutual fund charges and exit load.

What are the real drawbacks of mutual funds?

Even with the fears answered, some downsides remain.

• No assured return. Values go up and down, and a fund's documents say there is no assurance it will meet its objective.
• Yearly costs. The expense ratio is taken whatever the market does.
• No say over holdings. The fund house picks what the fund buys. You own a share of the scheme, not the shares themselves, and cannot veto a purchase. A PMS, a portfolio management service, works differently; see mutual funds vs PMS and SIFs.
• Lock-ins and exit loads. A lock-in is a period when you cannot sell. ELSS, the tax-saving fund, locks units for three years from purchase, and each SIP instalment has its own three years.
• Delays in a crisis. A fund may restrict redemptions only in a market-wide crisis, such as an exchange closing, for at most 10 working days in any 90 calendar days. Even then, requests up to ₹2 lakh are never restricted, and larger ones get the first ₹2 lakh paid.
• Funds can change. A change to a fund's fundamental attributes, its basic features such as its type, objective and fees, needs written notice and an exit at NAV without exit load.
• Tax on gains. Under the Income-tax Act, 2025, an equity-oriented fund holds at least 65% in listed Indian shares, on the annual average. Its units sold within 12 months are taxed at 20%. Units sold after 12 months are taxed at 12.5% on gains above ₹1,25,000 in a tax year, an allowance shared with listed shares. Other funds follow different rules.
• Tax saving only under the old regime. Money put into ELSS can be deducted under section 123 (the old Section 80C) of the Income-tax Act, 2025, under the old tax regime only. The limit is ₹1,50,000 a year across all eligible items.
• The risk label can change. It is checked every month, and a change is not a fundamental attribute change.

Who should not invest in mutual funds yet?

Mutual funds fit badly with money you will need within a short time. They also fit badly with a household that has no emergency savings, or with someone who would sell in a panic at a fall.

Without emergency savings, a sudden expense can force a sale when prices are low, or stop a SIP. Redemptions take up to three working days to pay out, and equity values can sit well below cost for months. Where to keep emergency savings covers that side.

Those are factors, not a verdict.