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You must have heard ‘mutual funds sahi hai’, but have you ever wondered what makes them ‘sahi’ or why they are ‘sahi? Also, almost every advisor or consultant asks to keep investing in mutual funds even if the market conditions are not favourable. But, is investing in mutual funds really worth it? Are they completely risk-free, which makes them suitable for investing?

To answer these questions let's deep dive into the risks involved in mutual funds.

Just like every coin has two faces, every story has different perspectives, and everything has its own pros and cons, mutual funds also have different outlooks.

There is practically nothing in this universe which is risk-free, be it finances, relationships, career choices, or any kind of decision. And if everything is risky then the main differentiator becomes ‘risk management’. When we invest in mutual funds, the fund manager manages our portfolio and invests our money in various asset classes according to our chosen funds. And this makes our portfolio diversified and less prone to risk.

But, never makes it completely risk-free.

While investing in mutual funds majority of the investors chose the ‘invest and forget’ strategy. But, it is highly important to thoroughly know the risk associated with any investment you do.

So, let us know the risks associated with mutual funds.
 

• The Equity Risk
  While investing in equity-based mutual funds, our investment gets exposed to stock market risks. This can lead to fluctuation in the value of mutual funds, translating into a decrease in the investment value. Moreover, some foreign factors or economic conditions may affect the value of the investment. So, considering these risks equity mutual funds are preferred by those who have a higher risk appetite and long investment horizon.
• Interest-Rate Risk
  This risk is associated with debt mutual funds. The price fluctuation in the bond market affects the interest rates as the interest rate and bond prices are inversely proportional to each other. So, if the interest rates increase for the new debt instruments then there are chances of a decline in your investment value.
• Inflation Risk
  In simple words, inflation is the increase of prices because of the eroding value of the rupee. And this results in a decrease in the investment value in the long run.
• Credit Risk
  Credit funds are exposed to this risk. These funds basically invest in debt instruments with a lower rating and try to generate more returns than the average debt funds. And in this case, the mutual funds are the lenders, and the companies or government are the borrowers. Now, if the borrowers fail to repay then this will result in losses.

These were some of the risks associated with mutual funds. Just like any other investment mutual funds are also risky, but you must analyse these risks well before investing. But always remember, what Mark Zuckerberg said

“The biggest risk is not taking any risk... In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks".