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Any investment runs with the potential of making a loss. Mutual funds are one investing strategy that provides value for money and diversity to investors, but they also have significant risks.
Even if the odds of your holdings going down to zero are very low, just thinking about it is nerve-wracking.
In today’s article, we have discussed whether investing in mutual funds is risky and which risk factors to steer clear of.
Investing in mutual funds
In simple terms, a mutual fund is a trust that pools the funds of several individuals who have similar investment objectives.
An expert fund manager supervises a group of investors’ capital in such cases. Their job is to maximise the fund’s return on investment. The fund splits and distributes its revenue to the investors in a proportional manner.
This kind of investment vehicle pools the capital of several individuals or groups with similar investing goals and then invests that capital in various assets such as stocks, bonds, and so on.
Asset management companies (AMCs) in India are responsible for running various mutual fund schemes. Stocks, gold, bonds, and other assets are some of the ways that investors’ money is invested in a fund, depending on the goal of the fund.
Is investing in mutual funds safe?
When appropriately invested, mutual funds provide decent returns with little risk, particularly when compared with buying stocks.
Because qualified financial experts oversee them, mutual funds are ideal for those who need guidance in investing in the stock market. However, your best investment strategy may not always include a mutual fund.
There are lots of different factors that result in the underlying instruments’ price fluctuations, which might lead to losses. Hence, finding the right fund and knowing the risk profile are critical in this case.
A person may lose money when their net asset value (NAV) drops because of pricing volatility or fluctuation. NAV is the market value of all the plans an investor has invested in divided by the number of units they own. So, it’s crucial to figure out the risk profile and put money into the correct fund.
Are negative returns possible for mutual funds?
“What is the risk in mutual funds?” “Can mutual funds give negative returns?” These are common questions that arise while talking about mutual fund investments.
Any investment could go down to zero. In other words, if you buy stocks and one of the companies goes bankrupt, your investment in those shares is worth nothing. Investing in stocks carries that risk.
If, however, you have put your money into mutual funds, this is highly unlikely to happen. The odds of all the assets going down to zero are low in mutual funds.
The possibility of negative returns on some of your assets is not out of the question. However, a fund’s portfolio value will almost certainly never go to zero.
Types of risks in mutual funds investments
- Market risk
Every investor has the possibility of losing money if the market doesn’t do well. This is what we call market risk or systematic risk. Numerous factors affect the market. Diversifying one’s assets might not be enough in such situations.
- Interest rate risk
Interest rates fluctuate as a result of supply and demand in the market. They have an inverse connection with each other. If interest rates were to rise over the investment term, the value of securities could fall.
- Liquidity risk
There is a higher chance of liquidity risk when investing in a mutual fund like ELSS, which has a lengthy and strict lock-in period. With this kind of risk, it’s common for investors to lose money when they try to cash out their assets.
- Credit risk
A credit risk occurs if the scheme’s issuer cannot fulfil the offered interest. Rating agencies often use these factors to rank investment firms. A company with a high rating will always pay less, and the opposite is also true. There is credit risk associated with mutual funds as well, especially debt funds.
Conclusion
The truth is that before choosing a certain kind of mutual fund to invest in, investors need to consider the market sentiment and condition.
Keep in mind that a high return on investment for a mutual fund is dependent on several factors, including the asset class’s liquidity, the return on investment of the underlying securities owned by the fund, and the fee ratio.
FAQs
No, mutual funds are not 100% safe. They are subject to market risks and the performance of the underlying assets. The returns from mutual funds are not guaranteed and may vary depending on the type of fund. However, SEBI and AMFI regulate mutual funds, ensuring transparency for investors.
Yes, you can lose money in SIP if the value of the mutual fund units goes down. The returns from SIP depend on the performance of the fund and market conditions. However, SIP can help you reduce the impact of market volatility over time.
There is no definitive answer to this question, as it depends on your investment goals, risk appetite, and time horizon. FDs offer fixed and guaranteed returns, but they are taxable and have low liquidity. Mutual funds offer variable and market-linked returns, but they are tax-efficient and have high liquidity.
Yes, SIP investments can go negative if the NAV of the mutual fund falls below the average purchase price. This means that your investment value is less than the amount you have invested. However, this is a temporary situation and can be reversed if the NAV recovers in the future.
If the market crashes, the value of the mutual fund units will also fall, as they reflect the performance of the underlying assets. This will result in a loss for the investors who sell their units at a lower price than their purchase price.