4 Risks Associated with Mutual Funds

Here's an overview of the significant risks of investing in mutual funds-

1. Market Risk The heavily advertised disclaimer 'Mutual fund investments are subject to market risks' fittingly highlights the primary risk associated with mutual fund investments. Market risk is the risk related to fluctuations in the market. The ebb and flow of security prices may negatively impact the NAV of the mutual fund scheme. There are numerous economic and social triggers apart from companies' performances that influence market behaviour like inflation, recession, natural calamities, political scenario, etc.{2D743194-97C2-43F9-BC28-AEC370801ECD}
2. Interest Rate Risk Interest rate risk impacts debt-oriented mutual funds, that is, funds that allocate their assets mainly to fixed-income instruments. Interest rates have an inverse relationship with the value of interest-yielding instruments. Interest rate risk is the risk that a surge in interest rates will cause the value of debt securities to mainly debt to decline, consequently affecting the scheme's asset value.
3. Credit Risk Credit risk is another type of risk that impacts funds investing in debt and money market instruments like commercial paper, certificates of deposits, treasury bills and bonds. Credit risk is the risk that the creditworthiness of a security is impaired, thereby impacting its credit rating. This negatively affects the value of the instruments as investors start losing trust on the ability of the borrower to fulfil any debt-related obligation.
4. Liquidity Risk Liquidity Risk pertains to the redemption of money invested and marketability of the units held in a mutual fund scheme. It is the risk that the amount invested in a mutual fund will not be redeemable when required or will have to be redeemed on suffering a loss. Many schemes in the market offer tax benefit to investors; however, these schemes come with a lock-in period.

In a bearish trend, where all investors are looking to exit the market, the mutual fund may be forced to sell investments to fulfil the massive amount of redemption requests but may not find buyers for the same. This shall translate into liquidity risk.Asset management companies take tremendous amounts of effort in mitigating the risks that mutual fund investments are exposed to. Even so, every investor must understand these risks and make a calculated decision.

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.