You’re unlikely to have missed mutual fund commercials that end with the disclaimer “Mutual fund investments are subject to market risks, please read all scheme related documents carefully.” Have you ever wondered what that means? Here are the various kinds of risks that mutual funds are subject to:
Interest rate risk
When a debt fund invests in fixed income securities, they may be subject to interest rate risk due to the rise or fall in interest rates.
This is applicable to the underlying fixed income securities of mutual funds. If a bond issuer cannot repay a bond it may end up being a worthless investment.
Lack of control
As much as mutual funds offer the convenience of investing, the investors cannot determine the exact composition of a fund’s portfolio, nor can they directly influence which securities the fund manager can buy.
While the above disclaimer holds true for these risks, investors are also advised to be aware of other regulatory risks or changes while investing.
Risk and Reward
The key to reducing risk is diversification or as the saying goes ‘don’t put all your eggs in one basket.’ The diversification that mutual funds provide can help to ease risk by offsetting losses of some securities with gains in others.