Investing in Mutual Funds comes with various risks, depending on
the type of fund, market conditions, and investment objectives. Hereโs a
breakdown of the major risks involved:
๐ป 1. Market Risk (Systematic Risk)
The value of your mutual fund investment may decline due to market volatility.
Factors: Economic downturns, geopolitical events, interest rate changes, etc.
Affects: Equity, hybrid, and even debt funds to some extent.
๐น 2. Interest Rate Risk
Mainly affects debt mutual funds.
When interest rates rise, bond prices fall, which can reduce the value of debt
fund investments.
๐ฆ 3. Credit Risk
Risk that a bond issuer (e.g., a company or government) may default on
payments.
Higher in: Debt funds with lower-rated instruments.
๐ 4. Liquidity Risk
Difficulty in selling fund holdings quickly without affecting their price.
Happens in less liquid funds or during market crises.
โ๏ธ 5. Concentration Risk
If a mutual fund invests heavily in a few sectors or companies, it increases
exposure to underperformance in those areas.
๐ 6. Currency Risk
Affects international mutual funds.
Currency value fluctuations can impact returns when investing in foreign
assets.
๐ผ 7. Fund Manager Risk
The fund's performance heavily depends on the skill and decisions of the fund
manager.
Poor judgment or strategy can lead to underperformance.
๐งพ 8. Inflation Risk
The return from the mutual fund may not keep pace with inflation, especially in
conservative debt funds.
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How to Manage These Risks:
Diversify across asset classes and fund types.
Choose funds aligned with your risk tolerance and goals.
Review the fundโs past performance, expense ratio, and fund manager profile.
Stay invested for the long term to ride out short-term volatility.