Mutual funds have become one of the most popular investment options across different categories of investors. Mutual fund houses invest in different asset classes like equities, bonds, government securities and gold. These funds are easy investments that aim to offer liquidity, high returns, convenience, and straightforward exits.
Notably, mutual funds are managed by financial professionals, also known as fund managers who collect funds from investors and invest them in different financial assets, in exchange for promising returns. However, just like any other investment option, mutual funds also come with their own set of risks.
Let’s explore deep and know about some risks that are associated with mutual funds.
Mutual Funds Risks
It is pertinent to note that there are several factors due to which mutual funds can be considered risky. As mutual funds invest in a variety of financial securities, the prices of these assets change constantly as per the market conditions. These fluctuations display volatility in market price, thus impacting the net asset value (NAV) of the mutual fund portfolio. Thereafter, the performance of mutual funds is subject to market risks and fluctuations.
Despite having diverse investing solutions, mutual funds can come with these risks:
Asset class risk: As mutual funds invest in a variety of asset class which has their own features and characteristics, each of them carry a different degree of risk. This increases the chances of risks when investing in mutual funds.
Market risk: The performance of the market poses a major threat to mutual fund investors. As the market is influenced by a number of factors, any sort of change in market sentiment or factors like inflation, recession as well as change in interest rates can largely impact the mutual funds.
Interest rate risk: Changes in interest rates have the potential to impact mutual funds significantly. Notably, the risk with interest rates is mostly faced by debt mutual funds and the availability of credit from lenders, and the demand from borrowers also affects the interest rates.
Liquidity risk: This kind of risk comes to the fore when investors find it difficult to redeem their investment without suffering a loss. In such a situation, they find it difficult to withdraw their money from the mutual funds.
Concentration risk: Investors need to ensure that they don’t concentrate their investments in a particular asset class or sector, so as to avoid concentration risk. This can increase the risk factor to a great extent. In such cases, investors can pick funds from different mutual fund companies, instead of investing in multiple schemes from the same category.