Understanding Risks In Mutual Fund Investing

Mutual funds carry risks owing to the fact that they invest in a diverse variety of volatile financial instruments such as equities, corporate bonds, government securities, and many more. Armaan Madhani sheds light on the various kinds of risks and how they can be measured

- Armaan Madhani

To quote famous radio talk show host Barry Farber, “There is no reward in life without risk.” On similar lines, we can say that there is no investment that furnishes returns without risk. All investments are subject to some risk. Mutual funds are one of the most popular investment instruments. They are convenient, diversified and professionally managed which often deliver attractive returns. Yet, although mutual funds are considered to be relatively safe investment tools, their performance depends on the prevailing market variations. Upon hearing the words ‘mutual funds’, the classic disclaimer “mutual fund investments are subject to market risks” immediately rings a bell in our minds.

Though mutual funds offer broader diversification and value-for-money to retail investors, there are numerous risks associated with investing in mutual funds. Mutual funds carry risks owing to the fact that they invest in a diverse variety of volatile financial instruments such as equities, corporate bonds, government securities, and many more. Each of these securities fluctuates differently in markets on the back of almost countless number of factors, eventually leading to profits or losses. In this cover story, we delve deep to procure a better understanding of the different types of risks in mutual funds as well as explore the distinct parameters used to measure and analyse risk.

Types of Risks in Mutual Funds

Market Risk