Mutual Funds: Assessing the Risk Factors

Investment in mutual funds has been gaining momentum considering it is regarded as a safer instrument as compared to stock markets. Diversification, professionally managed, mutual funds provide decent returns. However, as an investor, you need to be wary of the risks before making that move to invest in a mutual fund scheme. 

Returns not guaranteed: As an investor, you need to be aware that mutual fund schemes are not guaranteed, assured returns, or capital appreciation products.

Investment risks: These could be trading volumes, settlement risk, liquidity risk, and default risk, including the possible loss of principal.

Security-specific risks: As the price, value, or interest rates of the securities in which the mutual fund scheme invests fluctuate, the value of an investment in a scheme is likely to witness an upswing or downswing.

General market risks: In addition to the factors that affect the value of individual investments in the scheme, the net asset value (NAV) of the scheme could fluctuate with movements in the broader equity and bond markets. They may be influenced by factors affecting capital and money markets in general, such as, but not limited to, alteration in interest rates, currency exchange rates, changes in government policies, taxation, political, economic, or other geopolitical dislocations, besides increased volatility in the stock and bond markets.

Most importantly, remember that the past performance of a particular mutual fund scheme is no guarantee for its future performance.

Any financial investment vehicle comes with a certain level of risk incorporated within. As an investor, it is important to be wary of the associated risk before investing in a mutual fund scheme. Essentially, the focus should be to build a diversified portfolio that not only aids in achieving the financial goals but also safeguards you against all the risks.