Types of RISK FACTORS ASSOCIATED WITH MUTUAL FUNDS
As we know Mutual Funds offers a variety of schemes and portfolio of products in order to reduce the risk but remember it does not eliminate your risk completely even though you invest in the equity market or debt market through Mutual Funds the risk associated with those markets remain with you. Just like in any other investment, Mutual Fund investment also carries certain risks, the risks in a particular scheme of a mutual fund is basically of five factors:
1. Market Risk:
In generally, there are certain risks associated with every kind of investments of shares. They are called market risks. The market risks can be reduced but even by a good investment management risk cannot be eliminated completely. The prices of shares are subjected to wide price fluctuations depending upon market conditions.
2. Credit Risk:
The debt servicing ability of a company through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A ‘AAA’ rating is considered the safest whereas a ‘D’ rating is considered poor credit quality. A well-diversified portfolio might help mitigate this risk.
3. Scheme Risks:
There are certain risks inherent in the scheme itself. All depend upon the nature of the scheme. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns and in the case of a growth scheme, one has to take more risks. (high risk- high return)
4. Investment Risks:
Whether the Mutual Fund makes money in shares or loses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertise of various funds are different and it is reflected on the returns which they offer to investors.
4. Business Risk:
The corpus of a Mutual Fund might have been invested in the company’s shares. If the business of that company suffers any setback, it cannot declare any dividend.
5. Political Risk:
Successive Governments bring with them fancy new economy ideologies and policies. It is often said that many economic decisions are politically motivated. Changed in Government bring in the risk of uncertainty which every player in the financial service industry has to face. So Mutual Funds are no exception to it.
6. Liquidity Risk:
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. It can be partly mitigated by diversification as well as internal risk controls that lean towards the purchase of liquid securities. It simply means that you must spread your investment across a portfolio of securities (stocks, bonds, money market instruments, real estate, fixed deposits, etc.). This kind of diversification may add to the stability of your returns, for example, during one period of time equities might underperform but bonds and money market instruments might do well.
7. Inflation Risk:
Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could, at the time of investment. A well-diversified portfolio with some investment in equities might help mitigate this risk.
All the above are the risk factors associated with Mutual Funds which are fluctuating the market & no one can predict the market exactly i.e how it flows. So, before investing in any particular scheme one has to read all the scheme related documents carefully and move forward to it.
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