Risk Associated with Mutual Funds

By admin_mutual | Jan 10, 2023

The risks associated with investments vary. Investing in mutual funds is not risk-free either. Mutual funds have some inherent risks even though they are diversified investment options.

• Market Risks: For any investment vehicle, market risk is the most well-known and prevalent risk. Simply put, market risk is the chance that the economy or market will weaken, causing loss of value for individual investments regardless of performance.
• Risks Associated with Inflation: This denotes the risk of loss of purchasing power. Simply put, in case there is 5% annual earning of your mutual funds and your cost-of-living increases by 2%, your net investment returns are only left at 3%. It is also called “Real rate of return”.
• Concentration Risks: It is not a good idea to put a lot of one person’s investment into one particular scheme. If one is lucky, profits could be enormous, but losses would be greater. It’s also very risky to concentrate and make significant investments in one industry.
• Interest Rate Risks: Debt mutual funds are primarily affected by this type of risk. It discusses the threat of increasing interest rates and how they affect bond prices. Here, the well-known inverse relationship between interest rates and bond prices—where bond prices fall as rates rise, lowering capital gains—plays a significant role.
• Liquidity Risks: The inability to redeem some investment with no loss in the instrument’s value is referred to as liquidity risk. It can also happen if the seller of the security is unable to find a buyer. The lock-in period in some types of mutual funds, such as ELSS, may lead to liquidity risks. During the lock-in period, nothing can be done. ETFs or Exchange traded Funds may experience liquidity risks in yet another situation. These can be sold and bought on stock exchanges just like shares, as you may already be aware. Occasionally, investments are impossible to redeem when required the most, because there are not enough buyers in the market.
• Lack of Control: Although mutual funds make investing more convenient, investors have no direct control over the securities that make up a fund’s portfolio or how much of them can be purchased by the fund manager. Although the fund may be sufficiently diversified, the investor does not have any influence over the decisions made by the fund manager.
• Country Risks: This risk arises from shifting conditions in the economies of the countries where the fund has investments. The fund’s returns could be impacted by economic unrest or statutory changes in the foreign nation. This risk primarily impacts foreign investments.