Financial market is a platform where people try to make money from their existing wealth.
This wealth maximization is made by investing and trading of stocks in the share market. And mutual fund is the most sought after instrument investment in India.
This is because it is easy to operate and relatively less risk-prone.
‘Less risk-prone’ here doesn’t mean that mutual funds are a completely safe vehicle to invest in.
It only means that it exposes a little low risk than that of other instruments of investment. In fact, in extreme cases, a person can even lose all the invested money from the mutual fund.
Mutual fund risks are categorized under systematic risk. This is because an investor does not focus only on one stock, but the nature is diversified.
The Mutual fund pools money through several securities. This method distributes the risk according to the security invested in.
Therefore, the risk is enlarged.
Mutual fund investment surely a risky venture. Anything used as a stimulus has to be risky in a way or another. The same goes for mutual fund.
Since investing in a mutual fund increases your wealth, it has to contain risk to some extent.
Because without risk, there will be no guarantee of return at all.
Since we know that mutual fund include risk, now the question is how to invest to earn capital and dodge risk?
A person investing in a mutual fund should have at least basic knowledge about the market and operation.
“Practice makes a man perfect.” The phrase is aptly applicable here.
The better you know about the investment and opportunities and the more you practically apply that knowledge, the less your investment will be exposed to risk.
A better way to safeguard your investment is to track the performance and return rate of the schemes you are investing in.
The return on investment varies year to year. If the fluctuation in the return rate of the scheme is high, it can be a risky venture.
You should find stocks with comparatively stable returns on investment to avoid high chances of risk.
A person should find a trustworthy fund manager with good knowledge and portfolio to avoid mismanagement and dishonesty.
Other ways to avoid risk is to understand what type of investment you are making.
Since, the mutual fund pools money from a number of securities diversifying the range of risk, investors should know what kind of risk they are taking.
Also Read: A Comparative Analysis of Liquid Fund and FD
Here are 5 types of risk that an investor may suffer during their operating period in mutual funds:
It is the asset liquidity risk.
Liquidity risk refers to the blockage in trading of assets due to sudden bad market condition.
Here the risk arises for the investors as they might face a decrease in value of their asset or cannot trade the securities at all.
The risk incurred from the political, economic or technological changes are called country risk.
In a broader sense, the country risk involves the uncertainty of rise and fall in the units of investment due to change in political or economic scenario of the country the funds are invested in.
Currency risk is also known as exchange rate risk.
It arises due to risk of decrement in the value of investment owing to sudden change in relative currency.
Here, the change in the value of one currency effects the value of another currency.
Firms that operate overseas and work in more than just one currency are liable to be exposed to currency risk.
If a borrower fails to repay the loan amount, it can block the cashflow which will ultimately affect the investor’s fund.
The inability to get back the lent money causes credit risk.
For example, a debtor loans money to B, however, B fails to pay back the borrowed amount as well as the interest.
Here, the debtor will face the risk of never getting back his lent amount let alone the interest.
This risk arises due to volatility.
It is the risk of loss in investment due to fluctuation in price.
The market is always full of uncertainties which is the greatest risk. It can make the price of units falls as well as rise.
This uncertainty threatens the investor’s money the most.
The Bottom Line
Risk is a core element of mutual fund investment. Though the intensity of risk may vary upon the type of investment made.
A person should do a thorough background check on the scheme they are about to invest in.
Also, investors must have good knowledge about the market to avoid faulty transactions.
Knowing the type of risk you are about to take in helps you prepare yourself to tackle it.
Therefore, only good knowledge and frequent investing practice can help you escape the maximum of risk.
So, be informed, be alert. Analyse the healthy risk that have good chances of converting into returns and keep on investing.
Because taking risks is what gives you the hope of earning good revenue.