What are the risks involved in investments in mutual funds?



People are advised to invest in mutual funds depending on their “risk appetite”. As a beginner I need to understand what is implied here and how does one assess risks involved in such investments. How should one choose funds which will minimize risks but give reasonably good return? It seems some comprise has to be made, but how? Kindly explain in some detail as I am new in this area. Thanks in advance.

What are the risks involved in investments in mutual funds?
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8 Replies to “What are the risks involved in investments in mutual funds?”

  1. Most of the mutual funds ( particularly in equity schemes ), collect lots of money from small investors and invest the same in various equities/shares. Before investing they do deduct all operating expenses from the collection.

    Though the fund managers are experienced and well learned, investments in shares is the riskiest one in all the investment options. No fund manager can guarantee returns or even the base capital. This is the most important risk in mutual fund investments.

    Of course the fund managers are better than an individual most of the times. If you don’t know much about investments and instruments, better you keep investing in mutual funds. Few good MFs are SBI, Birla Global etc.

    Always read the prospectus for where they are going to invest your money and how much money they will be deducting as expenses ( if they deduct more then ofcourse that is bad news for you).

    Keep reading on the subject and with more reading and experience, you will start understanding this better.


  2. Mutual fund risks vary by individual fund. Just because it is a fund, doesn’t mean that it is safe. For example, a mutual fund that is invested in subprime loans would be riskier than purchasing stock in a single, well managed established blue chip firm.

    Read through the prospectus for each fund that you are thinking about investing in. The prospectus will detail how the fund is structured, what investments the fund makes and the risk factors involved. Any investment will carry risk and mutual funds, while better protected due to diversification, will generally carry less risk than an individual stock, are no exception. You can loose some or all of your investment by investing in mutual funds. When projected returns are higher, risk of loss are generally higher.


  3. mutual funds re of two types–debt mutual funds and equity mutual funds.in debt mutual funds ur risk is lesser than equity mutual funds.but there is a risk.in eqity mutual funds the risk is more because the performance of equity mutual fund depends on global capital market conditins,economy and also
    our economy.the risk is, if the net asset value falls , u lose ur capital eg– if u buy 10000 units of any
    new mutual fund for rs100000(re 10 units each) and if the net asset value falls to rs 8 per unit fro rs10 per unit, u have a loss of 2 rs per unit and ur total loss is rs 20000.If the net asset value goes to rs12 per unit, u earn profit of rs 2 per unit so if u want to sell ur units, u can earn rs 20000 profit.
    the mutual funds cannot gurantee u fixed returns like what u get on fixed deposits.tHER is no problem of ur wealth erosion on fixed deposits.Only thing is the interest on Fd IS taxable. Dividend earned on eqity mutual funds is non taxable.To invest in eqity mutual funds, u MUST take
    opinion of wealth planner or a financial expert.Even their advice may not hold good 100 percent.this means even they may not be able to predict the trend with 100 percent accuracy so somewhere u may lose and somewhere u may gain..u have to calculate ur net gain.


  4. Equity Mutual Funds primarily invest in Secondary market(BSE & NSE). Hence when the market goes up or down your total amount in the fund adds up or erodes. There are few mutual funds which over perform the market. (and these funds fall lesser than the market).

    Understanding your risk appetite, is a simple formula. Reduce your age from 100 and that is the % you should/can be investing in equity markets. So if you are 30 year old, 70% of your total savings can go into equities(Stocks, MF etc) whereas 30% must go to debt investments (PPF, Bank deposits, Bonds etc etc). As your age goes up your risk appetite would generally decrease as you are more prone to need those funds you have invested.

    There are primarily 3 types of Mutual funds
    1. Debt Funds – > Which primarily invests in Debt market and hence returns are guaranteed(but less when compared to Equity Funds) and your capital is protected.(At any point of time your capital will NOT be eroded due to market movements)
    2. Equity funds -> Primarily in Equity markets. All depends on market scenario, if market goes up u’ll gain else u’ll lose
    3. Balanced fund -> A mix of 1 and 2, (The ratio is very imp here)

    I have been a mutual fund(equity) investor since 6 years now and I own few stocks as well and believe me my mutual fund returns are better than my individual stock picks. So its always better to invest in a good fund house.

    There are balanced funds as well in Mutual funds. These balanced funds invest some portion of your total investment in debt and remaining in equity(usually 60-40 E-D ratio , this changes over time and has a upper limit). You have to go through the scheme investing document thoroughly to know which suits you.

    Hope this information helps
    A very valuable source to know about MFs is
    http://www.valueresearchonline.com


  5. Is is better to invest in unmanaged index funds. Most mutual funds underperform the market averages because fund managers take part of the returns.


  6. I think is risk is something that is unavoidable when you are dealing in the market because everyone knows that markets are volatile and it is difficult to predict it.So if you are planning to invest in the market it is better you consult some expert like mansukh, religare or even india bulls because they can help you out in preparing a strategy that will ensure better returns on investment


  7. its true that u need to be careful on making your investment decisions. As u are a beginner u need to be very careful.
    to reduce risks and to have more returns one needs to take financial advice from a reliable person. i have done all my investments through http://www.sushilfinance.com/
    you too could choose an investment guide to help you better.


  8. It is great that you want to educate yourself before “diving in.” However, there is more to learn than anyone can impart here on Y!A. I would highly recommend heading down to your library or book store and picking up one or two books on mutual fund basics. “Mutual Funds for Dummies” is a good one, as is “Bogle on Mutual Funds.” It’s really not all that complicated, but this is VERY important stuff to know.

    Regarding your question, you are correct, in general. One of the key concepts in investing is the risk/reward spectrum. The more short-term volatility/risk you are willing to take on, the greater your expected long-term returns. For example, one of the “safest” investments right now is a bank or credit union CD. You are guaranteed not to lose any money, but those are only paying around 1-2% annually (depending on the term). Stock mutual funds are volatile – their values go up and down over the short term, and historically they have lost money in about 1 out of every three years. However, over the long-term, they have historically done very well, averaging about 8-10% annually over the last 100 years or so.

    I hope that helps. Good luck!





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