RISKS ASSOCIATED WITH MUTUAL FUNDS
Mutual funds bring together money from many investors and invest in stocks, bonds and other assets to create wealth over time. However, the value of these investments can go up or down. Knowing the risks helps you make informed decisions and choose the right funds for your goals.
The value of mutual funds is linked to the stock market and other asset prices. Changes in economic conditions, inflation, political events, natural disasters or global crises can cause the market to rise or fall.
CREDIT RISK
This risk mainly affects debt mutual funds. If a company or institution that the fund has invested in cannot pay interest or repay the principal, the fund may suffer losses.
DEFAULT
Some investments are not easy to sell quickly without reducing their price. If many investors want to withdraw their money at the same time, the fund may struggle to sell assets quickly, which can affect returns.
Changes in interest rates affect the prices of debt investments. When interest rates rise, the prices of existing bonds usually fall because new bonds offer higher returns. Longer duration funds are more sensitive to this risk.
If the return from a mutual fund is lower than the inflation rate, your purchasing power decreases. Over time, this can reduce the real value of your wealth.
Mutual funds have various expenses such as management fees, administrative costs, marketing and other operating expenses. These are deducted from the fund's assets and reduce your overall return.
If a fund invests too much in a single sector, industry, company or region, its performance becomes highly dependent on that area. Poor performance in that area can sharply impact the fund's value.
The success of an actively managed fund depends on the skills and decisions of the fund manager. Poor research, wrong stock selection or incorrect market calls can lead to underperformance.
KEY TAKEAWAY
If the market falls, the value of the investments in the fund also falls, leading to lower return for investors.
Lower the credit quality (higher the chance of default), higher the risk that the fund may lose money.
The fund may delay redemptions or sell assets at a lower price, which can reduce the value of your investment.
Rising interest rates can cause the value of debt investments in the fund to fall, even if the borrowers are paying on time.
Your money may grow in numbers, but it can buy less goods and services in the future.
Higher expenses mean a smaller portion of your money is actually working for you, reducing your return.
Lack of diversification increases the chance of higher losses when that sector or company performs poorly
What it means
Your return depends on the manager's judgment.
If the manager makes poor decisions, your returns may suffer.
During a market crash, such as in early 2020, the value of equity mutual funds fell by 20% to 40% or more.
If a company whose bonds the fund holds goes bankrupt, the fund may not get back the full amount invested.
Real estate or unlisted company shares may take time to sell. During market stress, the fund may face cash shortages.
If interest rates rise by 1%, a debt fund with long duration may see its value fall by 5% to 10% or more.
If inflation is 7% but your fund gives 5% return, your real return is negative 2%
A fund with 2% expense ratio will give lower return than a similar fund with 0.5% expense ratio over the long term.
If a fund invests 50% in one sector and that sector faces trouble, the fund's value can drop significantly.
A fund may perform worse than its benchmark or peers if the manager consistently makes wrong investment calls.
All investments involve some risk, and mutual funds are no exception. The goal is not to avoid risk completely. but to understand it, manage it and choose funds that match your financial goals, risk tolerance and time horizon. Diversify your investments, stay informed and invest for the long term.
Invest for the long term and stay patient
Review fund performance regularly
Understand the fund before you invest