Types of Risks Associated With Mutual Funds

ELSS is soon becoming one of the most popular tax-saving products in the market today. However, it does come with its own risks. Let us understand the risks associated with investing in ELSS funds.

When it comes to mutual funds, liquidity risk refers to the possibility that investors may not be able to redeem their investments without incurring a loss in value. Investments in ELSS funds are subject to a lock-in period of 3 years. During the lock-in period, the investor can neither redeem nor transfer his or her ELSS investment. In ELSS, the lock-in period may result in liquidity risk as no investment decisions can be taken during the lock-in period.

Market risk is the possibility that investors may have to bear losses due to the poor performance of the market. There are a lot of factors that may negatively impact stock market prices such as recession, political factors, market sentiment, etc. Equity Linked Savings Schemes are required to hold at least 80 percent of their portfolio in equity instruments. Therefore, the portfolio of an ELSS fund is vulnerable to market risk.

People investing in mutual funds usually attribute their decision to active and competent management of their funds. The mutual fund appoints an experienced professional as the fund manager of the scheme to manage fund’s portfolio. Performance risk is the possibility that the investor may have to bear losses due to the fund manager’s lapse in judgment which may negatively impact the scheme’s portfolio.

Most tax-saving options in India are debt-oriented. ELSS funds, however, are diversified equity-oriented investments . ELSS is considered to be a favorable investment avenue because it combines 2 important investment objectives- tax-saving and capital appreciation.Although ELSS funds have the highest potential to generate returns when compared with other tax-saving products, these returns come with an element of risk. This is because equity is considered to be a risky asset class exposed to volatility and market fluctuations.As can be seen, ELSS funds have a host of benefits to offer to their investors. That being said, ELSS investments also carry various elements of risk. Investors must assess their risk appetite and other essential factors before choosing to invest in ELSS.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.