11 RISKs of INVESTING IN MUTUAL FUNDS IN GLOBAL Era [Infographics]

11 RISKs of INVESTING IN MUTUAL FUNDS IN GLOBAL Era [Infographics]https://themoneyvalue.com/risks-of-investing-in-mutual-funds-infographics/Risks of investing in mutual funds in today's global environment. Nowadays when it comes to mutual funds, no one talking about the risk associated with it. Everyone is talking returns of the funds based on past performance. There is nothing in life which risk-free. Even Fixed deposits are subject to risk.

I was talking about someone the other day, he was not aware I'm a Chartered Accountant  & having good knowledge stock market & related instrument. A middle-aged man so excited about explaining to me the performance of the fund. In short, he wants me to invest me in the respective fund.

If you are new to mutual fund click here to read about basics of MF

I simply asked him what are the Risks of investing in mutual funds scheme.? How will you protect my investment? He was a blank for a minute. The problem here is no profit booking & selling of Mutual funds scheme. Yes, Most of the managers stay invested in stocks, there is a lot of reason why they stay invested & not book the profit.

Today's discussion about the Risks of investing in mutual funds & not why fund manager does not book the profit.

SEBI guidelines about Risks of investing in mutual funds

"Mutual fund investments are subject to market risk, please read the offer document carefully before investing.”

The same kind waring we saw on liquor or cigarette packs, but as an investor, we simply ignore this.

Many of us simply ignore this line when taking a decision. There is a variety of reason why we ignore this, but the main reason we are not aware of what kind of risk we are taking. in other words what hint the statutory warning is giving us.

“Mutual fund investments are subject to market risk, please read the offer document carefully before investing.”

We all might have heard this statutory warning issued by SEBI every now and then. But most of us ignore it like any other warning. Have you ever thought about over about the risks associated with the mutual fund? Over the years, SEBI has strengthened the mutual fund regulations in order to minimize the risk, but it is rather impossible to avoid the risks of all kinds.

Types of Risks of investing in mutual funds

Basically, risk divided into two categories Systematic risk & Non Systematic risk.

Also Read: Global Exposure in Mutual Fund

Systematic Risk:

Systematic risk, also known as "market risk" or "un-diversifiable risk" is the uncertainty inherent to the entire market or entire market segment.

Also referred to as volatility, systematic risk consists of the day-to-day fluctuations in a stock's price. Volatility is a measure of risk because it refers to the behaviour, or "temperament," of your investment rather than the reason for this behaviour.

Because market movement is the reason why people can make money from stocks, volatility is essential for returns, and the more unstable the investment the more chance there is that it will experience a dramatic change in either direction.

UnSystematic Risk:

In other hands, UnSystematic Risk is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. Unsystematic risk, also known as "specific risk," "diversifiable risk" or "residual risk," is the type of uncertainty that comes with the company or industry you invest in.


Source: Investopedia.

11 RISKs of INVESTING IN MUTUAL FUNDS IN GLOBAL Era

Here we will talk about both systematic as well as non-systematic risk. As definition now you must have a high-level idea. SEBI is doing good efforts. Therefore we can see that fancy line after every advertisement of MF's.

1. Market Risk in mutual funds:

You always read "Mutual funds are subject to "MARKET RISK". So what is a market risk? Is it in your control?  I know you have a lot of questions. So the Market risk is related to the performance of overall market. As Mr. Market not performing well, so your investment too. There are various reason why the market is not doing good. Maybe political or global Environment, Recession some big scams etc.

There is a verity of reasons for market risk. Is it avoidable? No, market risk is not avoidable. Diversification of Mutual fund portfolio will not help here. It's related to the overall market condition.

How can i overcome? The only option here be patience, wait to recover the market. Here the value of your investment decline due to overall market conditions.

2. Interest Rate Risk in Mutual funds:

Did you ever notice whenever RBI increase or decrease interest rate, share market always react on it? It is not directly linked to equity but indirectly yes.

So what Interest risks we are talking here. Generally, the value of fixed investment securities falls when the interest rate is rise. This is largely applicable to Debt Mutual funds. Also, some equity scheme who invest some portion in debts funds.

Also Read: Best Ways To Save Taxes in INDIA

3. Liquidity Risk in Mutual funds: 

Liquidity risk is where you are not able to sell an investment at cost or at profit.

What liquidity risk Mutual funds house have? The fund can’t sell an investment that’s declining in value because there are no buyers.

In case of ELSS mutual funds or Close-ended mutual funds, the liquidity of your investments freezes. You can not sell during this periods when you need most. Therefore when you decide to invest in mutual funds, it should be 8-10 years. In case of close-ended mutual funds, lock-in period is specified during investments.

4. Country Risk in Mutual funds: 

As a part of diversification, many of invest in other countries like Chiana, Brazil or USA.

Read Also: Global Exposure in Portfolio

One can say, to reduce the national risk we are investing outside of the country. What risk can we face there? Here is hack theses investments are exposed with the political,economic, natural calamity etc. in the country of investment.

Of course, you can minimize this risk but cannot be avoided. You can well aware of countries political & economic environment before investing. Again this can be minimised & cannot be eliminated.

5. Credit Risk in Mutual funds:

Let me take one example which is very common in India. Many times in India people lends money to the relatives. What happens if he/she fails to pay? You will call him defaulter right.

The same risk can seem in a mutual fund. Mostly debt mutual funds suffer from credit risk. If a bond issuer fails to repay the bond. This happens in case of bonds & debt instrument.

There is various rating agency like CIBIL, Crisil, ICRA etc. It is really important to look where the debt funds are investing. At a high level, all these agencies give A, A+, B etc. rating. Don't be fooled by % of the return. As saying goes "return on capital versus return of capital" hope you get the difference.

6. Currency Risk in Mutual funds: 

This is mostly in international investments. I mean investment out of your country. Say you are in India & Invested in the US. So you bearing a risk of US Dollar loses value against INR. More Weeker USD more you lose.

Many times currency slip in such a way& can ruin entire your years gain. Therefore it is really important to keep in mind bout currency risk while investing in outside of your home country.

Also Read: New eKYC EPFO Portal Link Aadhaar

How you feeling after reading 6 Risks of investing in mutual funds. A list does not end here let's see more kind of risk.

7. Sectorial Risk in Mutual Funds:

Do you know [.] Com bubble in the US? when the internet was new each & everyone talking about .com companies. Many internet companies valuation was on peak & everyone talking about future growth. The valuation was insane.Source: Wikipedia.

Many investors invested in specific sector & after 2000 when .com bubble burst we all know what happened.  Mutual funds always have this risk to lose the value in the specific sector.

What you & i can do is diversification. Never chose the sectorial funds instead go for a good mixture of various categories. If your stars are rocking you may earn good returns else loses will be high. As per my observations, chances of loses are more. One can select multi-cap funds to overcome this risk.

8. Concentration Risk in Mutual Funds: 

We already saw the Sectorial risk, concentration risks relate to this but at a high level about the overall portfolio. Let's see what i mean is.  As famous billionaire & Investment Guru says Never keep all your eggs in a Single basket.

The same thing is applicable here, never invest in the single scheme. One can diversify between verity of mutual fund schemes & global exposure.

Also apart from MF investment one can also look for other investment options.

Read here: Don't work for Money Let's Money Work for You.

9. Business Risk in Mutual Fund Schemes:

The business risks in mutual fund schemes refer to the possibility that an issuer of the bond or stock experiences a loss and in case of bonds unable to pay the interest of principal repayment.

This may be a verity of reasons like the investment on which scheme invested loses its value or bonds issuer unable to pay due to various reason.

For this reason, it is said that the mutual fund scheme should have a diversified portfolio.

10. Inflation Risk in Mutual Fund: 

Inflation means depreciating purchasing power of money. Let's say you buying XYZ item at $10 after 5 years same item you are buying at $12. It is due to inflation.

How this applies to investments? Your return on investment is 6 % and inflation is growing at 7%. Altemately you are losing on this front.

For example, if you were to invest in a fixed deposit with 6% interest to be realised in 1 year, and if inflation has been 8% that year, your real rate of return comes down to 2%, keeping purchasing power in mind.

Here are top 10 Risks of investing in mutual funds.

11. Reinvestment Risk in Mutual Fund: 

This danger of Interest Rate change is the point at which your venture is stopped in a Fixed Deposit or Corporate Deposit at the most astounding accessible interest rate (Currently over 9.85%) and there are no roads to reinvest the acknowledged sum with a comparable or higher rate of interest (For example if your interest is paid out after 1 year and the prevailing interest rate is 8% at that time)

As of now, we are at a loan cost top, it is prudent to secure for a more drawn out residency (gave your monetary objective time skyline licenses) to abstain from confronting reinvestment hazard.

Also Read: Cheap Car Insurance Companies in India.

Conclusion:

Risks of investing in mutual funds are ends here. There is nothing in the world which offers risk-free returns. Same is with mutual funds. A mutual fund does not offer guaranteed returns. Proper risk assertion & care can eliminate or minimise some risks.

One should read the Scheme Information Document [SID] before investing. Now i" hope you will not ignore the evergreen statement written all MF Schemes related documents "Mutual fund investments are subject to market risk, please read the offer document carefully before investing.”

What is your way to overcome from Risks of investing in mutual funds, Please Comment in a comment box!

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