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Some Risks Involved in Mutual Funds Investments – And How You Can Alleviate Them

We have put together some risks an investor may face while investing in mutual funds and the best way(s) to alleviate such risks. Visit https://www.investmentz.com/ to know more!

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Some Risks Involved in Mutual Funds Investments – And How You Can Alleviate Them

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  1. Some Risks Involved in Mutual Funds Investments – And How You Can Alleviate Them

  2. Liquidity Risks • The lock-in periods for mutual funds investments differ with the investment schemes opted for. Some of these may have very long lock-in periods, during which the corpus cannot be withdrawn without incurring a penalty. In such cases, the investor has to bear the brunt of losing a sizeable portion of his/her investment amount in case of a premature withdrawal. Thus, such investments tend to prove disadvantageous for those looking to fulfill their short-term investment objectives. • While opting for mutual funds, it’s a good idea to evaluate your investment goals first before investing. If you are looking to fulfill short-term goals, you could opt for mutual funds investments with shorter lock-in periods.

  3. Concentration Risks • Investing disproportionate denominations of your corpus in one of the securities and the rest of the amount spread across the remaining securities can lead the investor into running concentration risks. Such a risk results from not evenly spreading out the investment amounts between all the securities while investing in mutual funds. Diversification of your portfolio is the first step to off-setting market risks; however, investing the right amounts in each asset class helps one further alleviate concentration risks.

  4. “The fundamental law of investing is the uncertainty of the future.” – Peter Bernstein • Investing in securities has always involved massive speculation and uncertainties – and the more the doubts, the more are the strategies devised to off-set such risks. However, even amidst the hundreds of investment and trading techniques devised and implemented by investors, mutual funds investment remains one of the most popular and reliable means of investment. • However, no investment strategy is without its own set of drawbacks and risks, and mutual funds are no different. We have put together some risks an investor may face while investing in mutual funds and the best way(s) to alleviate such risks:

  5. Interest Rate Risks • Interest rates and bond prices share an inverse relationship with each other. This is owing to the fact that if the newly issued bonds have higher interest rates, the demand for the older ones with lower interest rates tends to plummet instantly. In order to keep up with the current interest rates, companies and financial institutions offering these bonds may reduce the prices of their bonds. • This reduction in price would automatically lead to an increase in the interest rate, thus enabling the demand for this bond to rise in accordance with the current market trends. To alleviate such a risk, an investor can:

  6. Diversify his/her portfolio to include different securities, including stocks, bonds, money market instruments and so on. If bond values are to fall in future, stock values are likely to increase; hence, it’s a good idea to invest in equities alongside. • Hold a bond until maturity, as the fluctuations in interest rates and prices cease to matter after the bond matures. However, if the bond is sold before maturity, it is directly subject to this inverse correlation between its price and interest rates.

  7. Market Risks • Thanks to our radio and TV ads, pretty much all of us can say the entire disclaimer “Mutual funds investments are subject to market risks…” without fumbling once! But this disclaimer actually provides what’s probably the most practical investment advice. Market risks can be caused due to multiple factors: economic crisis, political unrest, natural calamities, inflation and so on. In some cases, a study of the general political and economic scenario and predictions of market trends can come in handy in timing one’s investment. Reading the offer document of the fund house and considering the company or institution’s objectives and vision are other major investment prerequisites.

  8. However, certain market risks happen due to totally unexpected, unpredictable and unavoidable circumstances, such as a sudden natural calamity or crisis. In such cases, speaking to a registered investment advisor and persevering through the rough phase are the best bets. Many financial institutions also offer loans and other means of practical assistance that can help you support yourself and your loved ones during such tough times.

  9. Visit www.investmentz.com to know more!

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