“Mutual Fund investments are subject to market risks,” we’ve all heard. Have you ever wondered what these risks are? Not all risks have an effect on all fund schemes. The Scheme Information Document (SID) clarifies which risks apply to the scheme you’ve chosen.
It all depends on the mutual fund’s investment strategy. Particular securities are more vulnerable to certain risks, while others are vulnerable to others.
Professional assistance, diversification, and SEBI restrictions all help Mutual Funds manage risk. Mutual funds invest in securities, whether they are equity or debt, whose values fluctuate with market fluctuations. Because the NAV of the fund is based on the individual security values contained in the fund’s portfolio, they are unpredictable.
Mutual funds do help to spread risk, but they do not prevent it. A fund manager’s diversification decreases the market risk of the fund to the extent of diversification. The less risky a fund is, the more diversified it is.
Because of unavoidable risks that influence the entire market, the value of its investments decreases. The possibility of losing some or all of your principal. Because markets change, it’s always possible that the mutual funds you own will fall in value.
Systematic risk is another name for market risk. Diversifying one’s portfolio will not help in these circumstances. An investor’s only option is to sit back and wait for things to fall into place.
Concentration risk occurs when you put all of your money into a single mutual fund or sector. Your entire investment is badly harmed 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 industry.
Interest Rate Risk
Interest rates fluctuate based on the amount of credit available from lenders and demand from borrowers. They are diametrically opposed to one another. Increases in interest rates during the investment period may cause the price of securities to fall. Interest rate risk refers to the possibility that the value of a fixed-rate debt instrument would decrease when interest rates rise. If the base rate rises, the fixed rate will become less appealing.
The risk of a bond defaulting due to non-payment by the lender is known as credit risk. As a result, all mutual funds with bond exposure are affected. Bonds are given ratings by credible organizations depending on the risk they pose. PSU bonds, also known as AAA bonds, are the safest and have the lowest credit risk.
Liquidity risk refers to the difficulty of redeeming an investment without incurring 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 cause liquidity risk. During the lock-in time, nothing can be done. Exchange-traded funds (ETFs) may face liquidity risk in another scenario.