Are Mutual Fund Investment Risky? Know Types Of Risk Involved In MF Investment


Investment

oi-Sneha Kulkarni

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“Investments in mutual funds are subject to market risks,” we’ve all heard. Have you ever wondered what these risks are? Not all risks affect all fund plans. The Plan Information Document (SID) clarifies the risks that apply to the plan you have chosen.

It all depends on the investment strategy of the mutual fund. Specific securities are more vulnerable to certain risks, while others are vulnerable to others.

SEBI professional assistance, diversification and restrictions help mutual funds manage risk. Mutual funds invest in securities, whether they are stocks or debt securities, the value of which fluctuates according to market fluctuations. Since the net asset value of the fund is based on the values ​​of the individual securities in the fund’s portfolio, they are unpredictable.

Mutual funds help spread risk, but they don’t prevent it. The diversification of a fund manager decreases the market risk of the fund to the extent of diversification. The less risky a fund, the more diversified it is.

Market risk

Market risk

Due to the inevitable risks that weigh on the entire market, the value of its investments decreases. The possibility of losing all or part of your capital. As the markets change, there is always a chance that the value of the mutual funds you own will lose value.

Systematic risk is another name for market risk. Diversifying your portfolio will not help in these circumstances. The only option for an investor is to sit down and wait for things to fall into place.

Concentration risk

Concentration risk

Concentration risk arises when you put all of your money in a single mutual fund or sector. Your entire investment is seriously compromised if the industry falls due to government policies or insolvency. This type of mutual fund risk is common among investors. It is defined as a circumstance in which investors put all of their money into a single investment strategy or a single industry.

Interest rate risk

Interest rates fluctuate depending on the amount of credit available from lenders and the demand from borrowers. They are diametrically opposed to each other. Increases in interest rates during the investment period may cause the price of the securities to fall. Interest rate risk refers to the possibility that the value of a fixed rate debt instrument will decrease when interest rates rise. If the base rate increases, the fixed rate will become less attractive.

Credit risk

Credit risk

The risk of a bond defaulting due to non-payment by the lender is called credit risk. As a result, all mutual funds with bond exposure are affected. Bonds are rated by credible organizations based on the risk they present. PSU bonds, also known as AAA bonds, are the safest and have the lowest credit risk.

Liquidity risk

Liquidity risk refers to the difficulty of redeeming an investment without suffering a loss in value. When a seller is unable to find a buyer for a security, this can also happen. The lock-in period in mutual funds, such as ELSS, can lead to liquidity risk. During the containment time, nothing can be done. Exchange Traded Funds (ETFs) may face liquidity risk in another scenario.

Article first published: Sunday, November 21, 2021, 1:06 PM [IST]


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