In this lecture, we are going to discuss about different Risks of investing in mutual funds. So you all know that if there is a risk, there is a reward as well, which is known as a return higher risk, higher would be the return. So let us begin with. and also learn advantages of investing in mutual funds. lets start how do mutual funds work with risk.
1: Volatility Risk.
That first risk for volatility risk, typically equity based funds invested in the shares of companies that are listed on stock exchanges. The value of such funds is based on companies performance, which often gets affected due to the prevailing microeconomics factors. Such factors include a change in government directives, SEBI regulations, economic policy or policies or anything else. So the market is more volatile. If a mutual fund is investing in any good company and you do some government regulations, change in government regulations, obviously that stock might have a positive or a negative impact and that will impact that mutual fund portfolio as well.
2: Liquidity Risk.
The second is liquidity risk in mutual fund. Liquidity risk refers to the difficulty to redeem an investment without incurring a loss in the value of the instrument. It can also occur when a seller is unable to find a buyer for the security. So a mutual fund is investing enough that we can say about. And in we go. If the fund manager goes in the markets and tries to sell the bond but there is no seller don’t buyer variable. So we can say that it is a case of liquidity risk in mutual funds like the lock in period may result in liquidity risk for us because the lock in that, as we discussed, is three years. Nothing can be done during the lock in period. And yet another case, exchange traded funds might suffer from a liquidity risk. As you may know, ETFs can be bought and sold on the stock exchanges like shares only.
3: Interest Risk.
Next is interest risk in mutual fund, interest risk in mutual fund investment manifest in the form of different interest value and warns investors throughout the investment horizon, it is mostly rooted in the uncertainties pertaining to the capital and investor is likely to avail at the end of the investment horizon.
4: Credit risk.
Credit risk, credit risk and mutual fund investment often results from a situation where the issuer of the scheme fails to pay the promised interest in case of debt funds. Typically, fund managers include investment grade securities with high credit ratings. We discuss credit ratings, yes. So empty credit rating is high. It is always beneficial to invest in such kind of securities. The return on the interest rate is usually lower in a high credit rating as compared to low credit rating, so people often prefer low credit rating for the higher returns.
5: Inflation risk.
Next is the inflation risk. It can be described as the risk of losing one’s purchasing power, mainly due to rising inflation rate. Typically, investors are exposed to the impact of this risk when the rate of returns earned on investments fails to keep up with the increasing inflationary rate. For example, if the rate of return of a mutual fund scheme was five percent and the rate of inflation is three percent, then the investor is typically left with two percent return only.
6: Concentration Risk.
Next is concentration risk, less concentration generally means focusing on just one thing, focusing on just one thing, concentrating a considerable amount of a person’s investment in one particular scheme is never a good option. So why do we invest in mutual funds? The reason wasn’t diversification only, but it’s always better to diversify among mutual funds as well. Don’t invest your entire corpus in one mutual fund. Profits will be huge if lucky, but the losses will be pronounced at times. The best way to minimize the risk is by diversifying your portfolio. As we just mentioned, concentrating and investing heavily in one sector is also risky. These are also known as sectoral funds. The more diverse the portfolio, the less said the risk is.
7: Currency Risk.
Next is currency risk, the currency risk pertains to the fear that a decrease in the exchange rate will decrease the investment returns to elaborate. It is believed that when the value of foreign currency dominated denominated funds increases, it will result in a decrease in foreign currency. It will directly lower the rate of returns when exchange into an. I hope this lecture is clear to everyone, mutual funds.