Investment in mutual funds in India is becoming increasingly popular, particularly because of systematic investment plans (SIPs). However, investors need to be aware of the risks involved before making any investments. Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). Mutual funds offer diversification and professional management that makes it a preferred investment option.
Some of the risks associated with mutual fund investments are:
1. Market Risks
Market risks are factors or situations that are beyond the control of the mutual fund managers, such as market volatility. Equity mutual funds, in particular, entail market risks. Any fluctuations in the market may lead to changes in the mutual fund’s NAV, also known as the net asset value. In case the market experiences a downward trend, investors may lose money invested in the mutual fund.
2. Interest Rate Risks
Interest rate risks are factors that impact fixed-income securities. The price of a fixed-income security decreases when interest rates rise. The opposite is also true; in case of decreasing interest rates, the prices of fixed-income securities go up. Debt mutual funds are one of the most exposed funds to interest rates risk. Interest rate risks may lead to lower returns for investors.
3. Credit Risks
The creditworthiness of bonds and other fixed-income securities is a significant risk factor for debt mutual funds. A credit event, such as the company defaulting on a bond, may lead to a fall in the NAV of the mutual fund. It is essential to invest in mutual funds that have a high degree of creditworthiness.
4. Liquidity Risks
Liquidity risks arise when the mutual fund does not have sufficient cash in hand to pay for investors who want to redeem their shares. In such situations, the mutual fund company may be forced to sell its holdings, which may lead to a fall in prices in the market.
5. Inflation Risks
Inflation risks affect the purchasing power of the invested capital. The rate of inflation can reduce the real return on investments made in mutual funds. Investors should consider selecting mutual funds that provide higher inflation-adjusted returns.
6. Currency Risks
Currency risks are prevalent in international mutual funds. Currency fluctuations can affect the value of investments in such mutual funds. Changes in the value of foreign currencies may lead to losses or gains for investors.
7. Concentration Risks
Concentration risks arise when a mutual fund has a large holding in a single company or a single sector. Mutual funds that are heavily concentrated in a single company or a sector are more vulnerable to fluctuations in the market.
Investors should evaluate the risks associated with each type of mutual fund investment before making their investments.
SIP may reduce risks in mutual fund investments. Investors invest a fixed amount in mutual funds every month, quarterly, or semi-annually, thereby averaging out the cost of investment. SIPs in mutual funds are a low-risk investment tool, targeting long-term goals. In a volatile market, SIPs aid in avoiding market timing.
In conclusion, mutual funds provide diversification and professional management for your investments, but there are inherent risks. Investors should evaluate the funds’ past performances and their investment objectives before investing. Furthermore, a review of the mutual fund’s portfolio is essential. Further, it is crucial to select mutual funds that are in line with the investor’s risk appetite. In India, mutual funds operate under strict regulations, and SEBI oversees the activities of mutual funds. Exercising due diligence in selecting mutual funds and their asset management should enable investors to make profitable investments.