What are the Risk in Mutual Fund?
Mutual fund investment does not give a guaranteed return that means there is a huge chance of loss during maturity. The amount of loss is directly proportional to the amount of risk involved in mutual fund investment. Therefore, it is very necessary for investors to understand the types of risks involved in mutual fund investment. There are very common types of risk that affects the value of investment, these risks are Market Risk, Credit Risk, Inflation Risk, Interest Rate Risk, Investment Risk, Exchange Rate Risk, Policy Changes Risk & Lack of Control.
Let’s explain Risk in Mutual Fund Investment in details
1. Market Risk: – Market risk is also known as systematic risk. Under this risk, the price of securities in a particular market rises or falls due to the broad outside influence, which in turn affects the stock prices of both highly profitable companies and a fledgling corporations.
2. Credit Risk: – Credit risk refers to the amount of credibility of company where investors lend their money in the name of investment. It is also referred to the amount of certainty or surety that how much the company will pay the interest or repay the principal during maturities.
3. Inflation Risk: – Inflation risk occurs due to the loss of currency purchasing power. Under this risk, the general price of commodities rises very faster than the returns on investment.
4. Interest Rate Risk: – Interest rate risk occurs due to the change in interest rates which in turn, affects the prices of both equities and bonds in several ways. Investors can survive form these types of risks only by making a diversified portfolio.
5. Investment Risk: – There are several sectoral fund schemes where investments are made largely in equities of selected companies in particular sectors. The NAVs (Net Assets Values) of such schemes are directly affected as they are linked to the equity performance of such companies.
6. Exchange Rate Risk: – Exchange rate risk occurs due to the change in exchange rate which in turn, affects the investment of the fund because a number of companies generate revenues in foreign currencies.
7. Policy Changes Risk: – Policy changes especially with regard to the tax benefits play a significant role in mutual fund investment. These changes may impact the business model of the companies and ultimately affect the investment of the fund.
8. Lack of Control: – In mutual fund investment, investors cannot decide the exact composition of a fund’s portfolio because they are directly managed by the fund managers.