Mutual Funds

5 Ways to Reduce Mutual Fund Investment Risk

5 Ways to Reduce Mutual Fund Investment Risk

The Mutual fund is one of the most sought after investment plans in today’s world. This is because it is comparably easy to invest in MF than any other types of investing device.

Investing in mutual fund is as easy as putting in your funds and forgetting about it till the date of maturity. 

Mutual fund has become a favourite choice for people looking for small investments. And introduction of SIP has greatly influenced such investors to take initiative.



However, with all the good features of mutual fund, it cannot be forgotten that it is a risky venture.

Mutual funds are subject to market risk. A person can manage their portfolio and invest in less risky plans, however, the risk will never be zero.

There will always be a risk to lose your money or face a loss. This is why, it is important to gather basic knowledge about the market before you start investing.

Here are 5 basic ways that will help you reduce mutual fund investment risk:

Diversification:

A great feature of the mutual fund is that it offers diversification to the investors. 

When you are building your investment portfolio, you should keep it in mind to choose shares from all types of capital shares. Be it large cap, mid-cap or small cap, you should diversify your investment opportunities.

But, why is diversification so important? Well, when you distribute your investment units in different types and sections, you distribute your risk as well. 

So, even if you face risk in one share, others will cover the loss for it. This way, even if you are facing loss in some shares, you will still have a surplus.

You can also put your investments in different sectors such as IT, automobiles, financials and much more.

This way, even if the trends affect a sector and degrade its performance, some other will come up in trend and create surplus for you.



Also Read: 5 Most Common Financial Planning Mistakes People Make

Index fund:

An investor should have at leat one index fund in their portfolio. Index fund may be a little expensive, but they will help you earn market returns. 

Index funds always try to maintain their position and do not outperform in the index, they also have low expense ratio.

Systematic Investment Plan:

SIP is  the most sought after investment plan in today’s world. The reason is simple, feasibility and lower risk.

When you choose SIP, you do not need to invest a lump sump amount in the market. You can choose to invest a certain amount in little instalments over a period of time. 

This way, you are less affected by the market volatility. Even if the market fluctuates, you will be maintaining a balance and won’t suffer a big loss in any way.

If the prices are low, you will be buying more units. If the prices are high, you will buy fewer units and sell them on even higher prices when the time is right. 

This is called rupee cost averaging. 

This way, you will be managing your risk effectively.

Investment advisor:

An investor should have an investment advisor. It is impossible to track the trends of the market all the time.

 Especially with your busy schedule and if you are not a full-time investor, you will have little knowledge about the market.

At times like this, you are prone to make wrong transactions that can expose risk to your investment.

This is why, an investment advisor will guide you on how to make transactions and manage the risk. 

Manage your finances:

Managing your finances is of utmost important. This management should not only reflect in your investment plans but also in your other financial decisions.



If you are creating too much debt on yourself by loan, credit card or any other method, you will fall in a never-ending loop of financial debts and pay-outs. 

This will also affect your investment portfolio. 

You need to minimize your debts as much as possible. Otherwise, any revenue incurred from investment will be of no value in your life. 

The bottom line

Mutual fund is a risky venture.

However, with proper knowledge and guidance, a person can very well avoid those risks to an extent.



Further Reading: 

investica.com

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