Types of risks associated with mutual fund investments
As we know that mutual funds offer a variety of schemes, it is also considered to be a diversified investment vehicle which means that to a large extent because of its feature of diversification it reduces your risk, but remember it does not eliminate your risk completely which means that if you decide to invest in equity market or in debt market through mutual funds the risk associated with those markets still remain with you.
Maybe the impact of that through the mutual fund is much less then as compared to if you were to invest directly in those. If you talk about equity funds there are certain risks equated with equity marke.
macroeconomic risks.
As we know that stocks prices are always sensitive to what is happening in economies, be it local economy, be it international economies, how is the currency doing, what is happening to the interest rate, where is the inflation, how are the companies performing, all these factors have an impact on the stock prices.
So as long as the economy is doing very well that would reflect in the stock prices and that would reflect in your Net Asset Value (NAV). So always remember that macroeconomic factors will have an impact on your investments there.
Second risk is the liquidity risk. There are always going to be some stocks in the portfolio which may not be that liquid and also it depends on the nature of fund that you are invested in. For example, if you are invested in a large cap stock there there is no problem of liquidity because all these large cap stocks are quite liquid, but if you are invested in a small cap fund the liquidity is going to be an issue and there is also a risk of volatility.
We know that equity market by nature is volatile. So whenever you invest in equity funds keep at the back of your mind that you may have to face volatility from time to time and be prepared for that.
If you talk about debt funds, debt funds again there is a risk of interest rate. There is an inverse relationship between interest rates and the bond prices which means that every time the interest rate goes down there are certain types of debt funds which will do very well and there are certain types of funds that will not do very well. So always keep an eye on emerging interest rate scenario.
There is also a risk of credit risk. What is that credit risk? When you invest in a bond fund the money is ultimately invested in some securities. Every security is actually rated. Make sure that when you invest in a fund, the fund has invested in higher grade investment securities because the company can default in terms of paying interest or principal or both.
The third risk as in the equity market there is also a risk of liquidity. Even though there is a secondary debt market, but it is not having that much of a depth today so there can always be some securities in the fund which the fund may find difficult to liquidate.
source :Hemant Rustagi