A mutual fund is a type of investment vehicle where a group of investors pool their money together and invest it in a variety of securities, such as stocks, bonds, and money market instruments. The money is managed by a professional fund manager who invests the money according to the fund’s investment objectives.
It is important to understand the risks associated with mutual fund investments before you invest. You should also choose funds that are appropriate for your risk tolerance and investment goals.
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Readers must note that mutual fund investments are subject to market risks. They must read all scheme related documents carefully before investing. The past performance of the schemes is not necessarily indicative of their future performance.
Some of the risks associated with mutual fund investments are:
Market risk: This is the risk that the value of your investment may go down due to changes in the overall market. This can happen due to a variety of factors, such as economic recession, interest rate hikes, or political instability.
Security-specific risk: It means that the risk where the value of a particular security in your mutual fund may go down due to factors specific to that security, such as a company defaulting on its debt or a downgrade in its credit rating.
Liquidity risk: This is the risk that you will not be able to sell your mutual fund shares quickly or easily, especially if you need to sell them in a hurry. This can happen if there is a lot of selling pressure in the market or if the mutual fund is illiquid.
Management risk: This is the risk that the fund manager will make poor investment decisions that will hurt the performance of your mutual fund.
Fees and expenses: Mutual funds charge a variety of fees, such as expense ratio, exit load, transaction charges etc.. These fees can eat into your returns over time. It is necessary to check them and understand before investing.
The level of risk associated with a mutual fund will vary depending on the type of fund and the investment objectives.
Here are some tips for minimising the risks in mutual fund investments;
Research: Before you invest in any mutual fund, be sure to read the prospectus carefully. This document will provide you with information about the fund’s investment objectives, risks, fees, and expenses.
Diversify your portfolio: By diversifying your portfolio, you can reduce your risk by spreading your money across different asset classes and investments.
Invest for the long term: The stock market is volatile in the short term, but it has historically trended upwards over the long term. By investing for the long term, you can ride out market fluctuations and increase your chances of achieving your financial goals.
Rebalance your portfolio regularly: As your financial situation and goals change, you may need to rebalance your portfolio to ensure that it is still aligned with your risk tolerance.
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