Investing in mutual funds can be a great way to diversify your portfolio and potentially earn a higher return on your investment. However, it’s important to understand the risks associated with mutual fund investing.
A mutual fund’s level of risk is determined by the investments it makes. An equities fund is typically riskier than a fixed-income fund because stocks are typically riskier than bonds. In addition, some specialist mutual funds concentrate on specific investing categories, including emerging markets, in an effort to boost returns.
The risk parameters associated with investing in the mutual funds are essentially the same as those associated with investing in any other type of investment opportunity- The value of the investment may decline and is susceptible to external risks over which you may have no control. Investments entail risk, just like other investment opportunities. The risk spectrum for various investments is varied in certain places. Mutual funds also involve risks in a similar manner.
Since high returns come with high risks and vice versa, taking the necessary risks is essential to realize the potential returns. It’s important to understand your personal risk profile before you start investing.
Mutual fund purchases on Fi.Money are commission-free. Its user-friendly layout allows novice and experienced investors to choose from more than 800 direct Mutual Funds. The fact that epiFi Wealth, a registered investment advisor with SEBI, manages Fi.Money further ensures its absolute security. With so many choices available, however, the ideal mix of mutual funds can undoubtedly assist you in effectively managing risk.
Understanding the pertinent risks will help you make better decisions about which funds are suitable for you and how to invest wisely to reduce the risks.
- What are the possible mutual fund risks?
- Associated Risks with Equity Funds:
- Market Danger
Market risk is the most well-known and frequent risk for any investment vehicle. Simply put, market risk is the chance that the economy or market will weaken, causing individual assets to lose value regardless of performance.
Daily price changes are typical for equity shares. Losses may occur as a result of poor market performance. A variety of factors impact the performance of the market. You can invest money in equities of publicly traded corporations through equity mutual funds. The fundamental risk in this situation is market volatility, which allows for stock price swings. A decline in stock prices would be detrimental to the mutual fund.
- Liquidity Risks
Liquidity risk is the danger brought on by a decline in market liquidity. Numerous factors, including rising interest rates and shifting currency values, could be blamed for this. Liquidity in the financial sector refers to the capability of promptly selling an asset to secure funds.
The inability to redeem an investment without suffering a loss in the instrument’s value is referred to as a liquidity risk. It can also happen if the seller of the security is unable to find a buyer. The lock-in period of mutual funds, such as ELSS, may lead to liquidity problems.
During the lock-in time, nothing can be done. Exchange-traded Funds (ETFs) may experience liquidity problems in yet another situation. ETFs can be bought and traded on stock exchanges just like shares, as you may already be aware. You could occasionally not be able to redeem your investments when you need them most because there aren’t enough purchasers in the market.
- Associated Risks with Debt Funds
- Debt/ Credit Risk
Credit risk refers to the probability that the scheme’s issuer won’t be able to fulfill its interest-payment obligations. Rating agencies typically grade companies that handle investments based on these factors. One will, therefore, constantly notice that a company with a good rating will pay less and vice versa. Credit risk affects mutual funds, especially debt funds.
You are subject to this risk when you invest in debt funds that buy fixed-income securities like bonds and debentures. The lenders of these securities are mutual funds, whereas the issuers are corporations and governments.
The failure of the borrower or the bond issuer to make interest and principal payments to the lender or mutual fund constitutes credit risk or default risk.
- Rate of Interest Risk
The amount of credit that is offered by the lender and the demand from borrowers both affect interest rates. Inverse relationships exist between them. If interest rates rise during the investment period, the price of securities may fall.
Your mutual funds’ value may decrease due to rising interest rates. Bond prices reduce as interest rates rise, and bond mutual funds may likewise experience a decline as a result. As a result, if the market interest rate rises, the value of a scheme portfolio could decrease. The coupon and maturity of the security determine how much the prices will drop or rise.
- Risk of Concentration
In most cases, concentration entails concentrating on a single subject. It’s never smart to put a large portion of one’s money into a single strategy. If you’re fortunate, your profits will be enormous, but occasionally your losses will be severe.
Investors can choose funds from various mutual fund firms and refrain from investing in multiple schemes from the same category to reduce concentration risk in equity funds. By diversifying your portfolio, you can decrease this risk in the greatest possible way. It’s dangerous to concentrate on and make significant investments in one industry. The risk is lower when the portfolio is more diverse.
- Risk Rebalancing
In this, the fund managers routinely adjust and evaluate mutual fund investments. Regular reinvestments, however, run the danger of losing out on opportunities for investment growth. Additionally, frequent rebalancing will increase the expense of managing the fund.
- Risk of Prepayment
This risk entails repaying the loan before it is due, which will alter the yield and duration for the mutual fund scheme. When interest rates decline, you typically use money borrowed at a lower interest rate to pay off high-interest loans. The average maturity of asset-backed securities (ABS) will be shortened as a result.
- Conclusion
A certain amount of risk is built into every financial product. The same holds true when purchasing mutual funds. The above-provided details give you an understanding of some of the hazards associated with mutual funds and how you might reduce them. Make sure you make wise mutual fund selections.
Fi.Money further simplifies the entire mutual fund process. With Fi.Money, you may set up recurring payments, also known as SIPs, to invest daily, weekly, or monthly. SIPs can be set up with a single-screen swipe. Fi.Money also offers complete freedom and doesn’t charge late fees. The most essential thing is to create a diversified portfolio that will protect you from all hazards while also assisting you in achieving your financial goals.