Our blog discusses the disclaimer, “Mutual fund investments are subject to market risk; please familiarize yourself with the offer document carefully before investing.”. That statement appears in every mutual fund advertisement. It is important we understand everything it means.
A risk-free investment is one that involves no risk. The investment of mutual funds offers broader diversification and value for money to individuals, but is not without certain risks as well. All investments are at risk due to market fluctuations. Nobody can forecast the future, so we should not expect to know what will happen in advance. A given asset’s value, for instance, cannot be predicted with certainty. Investments in mutual funds also subject to market risk since the market cannot be predicted with accuracy or controlled entirely.
WHAT IS MARKET RISK?
First, let’s get a better understanding of what risk is. Simply put, it indicates that something might go wrong. We all face risk in our daily lives, and we take risks in even the most mundane tasks such as driving to work every day or in everything we do. Similar to investments, risks are unavoidable when making decisions.
Money is invested primarily for the purpose of generating a profit. Investing in gold, real estate, or shares, for example, is based on the assumption that current investments will reap benefits in the future. A variety of factors can cause the price to go down just after you purchase it, depending on the market fluctuations. As a result, the prices move against their expectation.
Risks Associated with Mutual Fund Investment
Let us now look at the risks associated with investing in mutual funds now that we have discussed what risk is in general. Mutual funds have many advantages – from the strength of pooling resources to the ability to manage portfolios professionally – but they are subject to the same market and economic forces that all investments do. Therefore, an investor can learn more about them and use methods to cushion their effects.
Market risk is inherent in mutual funds because investors place their money in a variety of instruments, such as corporate bonds, debt, equity, and government bonds. The main reason for this is mainly due to fluctuations in the NAV.
You may also learn about Mutual Funds Investor Rights
Types of Mutual Funds
Risk associated with Mutual Fund Investment divided into systematic risks and unsystematic risks. The types of mutual fund risks described below.
This type of risk comes with a high interest rate that haunts the investor until the investment is over. The most vulnerable to changes in interest rates are debt funds, such as corporate bonds and government securities. This is because the interest rate changes according to how much credit the lender has available and how much demand the borrower has.
Market risk, including liquidity risk, affects mutual fund investments. A problem with redemption occurs when it is impossible to redeem, at the investor’s discretion, the investment without incurring a loss in value. Therefore, ELSSs come with a rigid lock-in period, so the investor is prohibited from redeeming the investment during times of need.
In other words, the credit risk of the scheme issuer suggests that the interest will not be paid as agreed. The fund manager will, therefore, incorporate high-quality investments with high ratings into debt funds. A fund manager may, however, choose to include lower-rated securities in order to boost the rate of return.