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Mutual fund investments are market-linked investments and thus are subject to risk. Investors are always advised to read all the scheme related documents carefully and then start their investment. Most of the people back out from investing in mutual funds, just with the thought that they are risky, and they may lose their money.
In mutual fund investment, risk and returns theses two words, go along with each other, to carry risk in your investment is not always unhealthy for your investment, sometimes taking a risk can benefit your investment and yield good returns or expected returns.
For example, suppose a person plans to go on a diet and from the day he decides, he changes his diet plan completely, and move towards salads and green vegetables. This he carries for 1 week, the day after 1 week he is invited for a dinner which is necessary for him to attend, having the thought that one-day heavy dinner is not going to affect his diet much, he goes for the dinner, well one day out will not have much impact on his diet, but what if he gets consecutive three or four invites which he can’t deny, and goes to attend, then in that case definitely, he is going to damage his diet plan.
Similarly, there is kind of risks in mutual funds investment, for an investor, it is necessary to decide which risk is likely to be taken in their investment that will not harm their investment and which risk is necessary to avoid.
In mutual fund investment, it is said the more you take the risk, the more you earn the return, but taking risks should also be planned. In order to take the risk in your investment, you first need to understand, and once you understand the risk associated with a mutual fund, it becomes easy to manage the risk on your investments. Read to know everything about them.
Market Volatility
The market is something that can never perform consistently, the fluctuation in its nature and it will fluctuate. Sometimes it goes up and sometimes it goes down. Market volatility becomes relevant when you are investing in market-linked investment, such as mutual fund, share market and more.
We know, for each mutual fund scheme, there is a NAV (Net Asset Value) that is published daily, after analyzing the market performance. The market performance or better say market volatility, depends on various factors, like immediate demand and supply of the security, the market sentiment, interest rate announcements and so on. All these factors create volatility in the market in the short-term, however, their impacts are less on long-term investments.
When a person goes on dieting and start eating salads, in initial days, he may experience changes in his body like weakness, low energy and more, but once they get habituated of it, the day after that will become easy for them and salads will become their favorite meal, and the ultimate result of their work routine will be, a good body and a healthy lifestyle.
Similarly, investors when they start investing in mutual funds, in the initial years of investment, the market volatility on their investment can disturb them, and sometimes may let them think to redeem their investment. At this stage, investors need to calm down and maintain their investment, time will come when they will get habituated to market volatility, and ultimately will be able to take the risk in their investment. They will be able to avoid market volatility effect on their investment and carry the investment for the long term, and the result would be good returns on their investment.
In investing, investors need to understand the degree of volatility, that they can absorb in the short-term, to fill their long-term requirements. A well-diversified portfolio and long-term investment help to manage market volatility risk in the best way.
Quality
Well, market volatility is something that affects or risk your investment externally, but there are internal factors that affect your investment internally, like, quality of management, and quality of fund manager.
Let’s come back to the salad, eating less is a good habit, but at the same time, eating nutritional food is also a need of your body. When you plan your diet, do calculate the nutritional value of the ingredients, and if you don’t then you are likely to put your health at risk over time.
Similarly, at the time you select a mutual fund scheme to invest, your choice should not be based on good performing funds, for the sake of receiving good returns, rather you should look on other internal factors, that can be detrimental to your portfolio.
You don’t go with immediate options of losing weight, like a weight-loss powder that promises 10 kilos weight loss in 10 days, as you know, if you choose it you must face its side-effects also, that is likely to happen.
Similarly, if you look for funds that promise high returns in the short-term, then you should be aware that in this case, the risk of capital loss is also high. Thus, before selecting a fund, do evaluate its past performance, track the record and performance of the fund manager, do check the quality of management of AMC (Asset Management Company) and then select a fund to invest. Product level diversification can aid in balancing this risk across your portfolio to ensure that not all your capital is subject to volatility.
Well, a person faces many kinds of their in all their life, and when they face it, they deal with it, they manage their risk but don’t run from them. In a similar way, in mutual fund investment also, the risk is manageable, only you need to follow the best and ideal strategies in the whole period of your investment. Always remember, without taking the appropriate risk, you won’t be able to create wealth for your goals, but at the same time, too much risk can also be dangerous for your investment, thus go with balanced risk. Invest in mutual funds and learn to manage the risk, but don’t run from them.
To know more about the risk associated with mutual fund investment contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).