Risk factors related to the fund

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When it comes to mutual funds, most people are afraid to try them, even because of the warning that we have become accustomed to hearing, after each announcement. ‘Mutual funds are subject to market risks. Please read the offer document carefully before investing.’ But simply decide not to invest without even understanding what those risks are a little ridiculous.

While it is true that every investment comes with its fair share of risks, it is not possible to obtain good returns from your hard earned money without taking a little risk. This is why it is very important when considering an investment in mutual funds.

The most important relationship to understand with regards to mutual fund investments is the risk- return trade-off. This can be very simply explained as – higher the risk, greater are the returns/loss and consequently lower the risk, lesser are the returns/loss.

There are many different risks, and mutual funds, investors should be aware of before investing. These include market, credit, inflation risk, interest rate risk, government/political risk and liquidity risk.

There may be a number of external influences that affect the overall market, which may cause prices and bond yields up and down. This can happen in the case of large enterprises and small and medium enterprises. This is known as market risk. However, a systematic investment plan that works on the concept of calculating the average cost rupee can help mitigate market risks.

Credit risk management which deals with investors in the debt through cash flows of the company. Credit risk is measured by independent rating agencies that the companies and their rate card. Rating of ‘AAA’ is considered the safest and D is considered bad credit. This risk can be reduced well-diversified portfolio.

Inflation risk is the most common risk that is prevalent in the market currently. Inflation is simply the loss of purchasing power over time. Most investors make conservative investment decisions in order to protect their capital in the long run. However most of these investors end up with a sum of money that will buy less than the principal could have at the time of investment. This is because inflation may grow faster than the returns on the investments. However a well diversified portfolio that invests in equities can help to mitigate the risk of inflation.

Liquidity risk is a risk that arises when it becomes difficult to sell the securities that one has already purchased. It can be mitigated partly by diversification and also by staggering the internal risk controls that lean towards the purchase of liquid assets.

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MLA Style Citation:
Srinivasan, Bindu "Risk factors related to the fund." Risk factors related to the fund. 6 Jan. 2011. uberarticles.com. 8 Apr 2012 <http://uberarticles.com/finance/mutual-funds/risk-factors-related-to-the-fund/>.

APA Style Citation:
Srinivasan, B (2011, January 6). Risk factors related to the fund. Retrieved April 8, 2012, from http://uberarticles.com/finance/mutual-funds/risk-factors-related-to-the-fund/

Chicago Style Citation:
Srinivasan, Bindu "Risk factors related to the fund" uberarticles.com. http://uberarticles.com/finance/mutual-funds/risk-factors-related-to-the-fund/

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