Mutual Fund Investments Are Subjected to Market Risks – Is It True?

Mutual Fund Services

After every advertisement on mutual funds, a disclaimer flashes on the screen stating, “Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.” It’s the one thing that encourages every potential investor to reconsider the matter before taking a step forward. So, we thought, let us put the spotlight on ‘risk’ today.

To start with, have you ever heard of a risk-free investment? Every investment accompanies a certain level of unpredictability, and no one knows when the value of an asset will rise or fall. Likewise, mutual fund investments bear risks. The market can never accurately predict nor have control over them. In the words of Naila Patel, the National Creative Director of Mirum India Pvt. Ltd, “If you know how to interpret that risk with the risk profiler and risk-o-meter, there’s a story waiting to unfold.”

Let us begin with the basics and move over to the tips to manage risks.

What is Meant by a Market Risk?

In layman’s terms, a market risk is an unexpected and unavoidable outcome. People normally invest money for the sole purpose of generating profit. They proceed with the thought that present investments in shares, gold and real estate shall benefit in the future. Nonetheless, market fluctuations often influence the prices to decline right after you buy it. As the prices go in the opposite direction than predicted, investors get the first taste of risk.

Risk Types As Discussed by Mutual Fund Services Providers

The risk we just now talked about is general. It can be of many types depending on the factors contributing, which can be natural disasters, investment instruments an investor places money on, etc. Let us discuss the various risk types you are most likely to come across:

• Liquidity risk – It’s the challenge of cordoning off an investment with a rigid lock-in period to abstain investors from redeeming the investment during an emergency. ELSS displays a similar type of risk, and the only way to avoid it is by selecting your funds carefully.

• Concentration risk – This is the type of risk that originates from a fluctuation in interest rates. The change relies a lot on demand from borrowers and credit available with lenders. The funds most affected by it are government securities, corporate bonds, and other debt funds.

• Credit risk – It is a risk arising from a situation where a scheme issuer is unable to pay the interest as promised. There is little wonder why fund managers incorporate only high-grade investments that have favourable ratings. Nevertheless, you may find fund managers including lower-credit-rated securities in the hope of improving the rate of return. Hence, it’s recommended for all to check the ratings as published by credit rating agencies before investing in debt funds.

Do you now understand the purpose of the disclaimer? It communicates the risks associated with mutual funds. Just as there are risks, there are ways to mitigate them. Let us have a look.

How to Manage the Risks Associated with Mutual Fund Investment?

Here are three effective ways to mitigate the risks:

• Invest via SIP

Instead of investing in bulk, do it in small amounts regularly over a long duration to seek promising returns. Let the power of compounding grow your money with every passing year.

• Creation of a portfolio representative of the investment goal

One of the most effective ways to offset the risk of mutual funds is through a profiled investment that represents the risk appetite of the investor. A well-balanced portfolio, combining debt and equity, typically suits a person with a low-risk appetite and a long-term financial objective.

• Diversification of portfolio

Ever heard of the adage – don’t put all your eggs in one nest? This is true for mutual funds. Spend time to consider your risk appetite and invest horizon to allocate your funds into debt and equity equally. It is called diversification of portfolio.

Key Takeaways:

Of course, mutual funds are subject to market risks. However, as long as you interpret them correctly, you can create wealth over the long run. The future is unpredictable. Sadly, no investment is risk-free. So, never get swayed away by the market noise, and if possible, seek mutual fund services from an expert. We are sure there is no looking back once you embark on this journey to multiplying your wealth.