The Greatest Misconceptions about the Investments and Risk
Investing in the mutual fund has become extensively in trend due to the convenience, safety, & good returns it provides to the investors. After the implications of the SIP investments online, more number of people flocked themselves into the amazing world of mutual fund investment. No doubt that it helps to invest conveniently and systematically, but it is not entirely risk-free. It also carries the risk which you might not be aware of.
“A ship is always safe at the shore, but that is not what it is built for,” Albert Einstein said these words long back in the history, but they still can be compared to our financial life and of course the investments. As per this phrase, you need to take some risk to achieve the desired goal. In short, the bigger the risk you take, larger will be the benefit you reap. Let’s know the critical misunderstandings about the investments and risk concept.
The Top 4 Confusions about the Investment and Underlying Risks:
- SIP Investment Helps to Nullify the Risk : Many people have this misconception about the SIP that it helps to reduce the risk to zero. But, no investments are risk-free, every investment carries a certain level of threat of losing capital or earning less returns. The risk is an integral part of any investment. Therefore, no one can eliminate the underlying risk of investing. Although the Systematic Investment Plan (SIP) does not zero down the uncertainty of losses but its excellent process allows you to cut down the risk to the minimum. One of the best features of SIP is ‘Rupee Cost Averaging’ which helps to average the market risk by purchasing the fund units at different market prices. Therefore, the smart plotting of your money into the most suitable fund may allow you to reduce the uncertainty to the minimum possible level.
- Risk & Volatility are Similar : This is again one of the biggest misconceptions of many investors that risk and volatility mean the same. Investors generally take the meaning of volatility as risk, but both the words have different meanings. Risk depicts the situation involving exposure to loss, whereas volatility means the fluctuations of the rise and fall of the price of the underlying asset at regular intervals. The volatility of a fund only describes the nature of the frequency of rise and fall during a specific time period. The risk gets associated with this when the fund is held for the short-term duration as in shorter period the high-volatile scheme doesn’t get the space to regain the value after jumping high in the southward direction.
- I Invested in the Best Fund : Most investors have this thinking that they got to invest in the best scheme as they already had made many checks on the various parameters like past performance, returns history, etc. But, as we already know that no one can guarantee the future market trends, the fund may perform on either side of the performance line. There are some macro and micro economic factors which affect the funds’ performance. Therefore, it is squandered to believe that the fund which you have selected has the best potential to provide high returns. The market can move in either way, and the risk is omnipresent in all investments. “Risk is what’s left over when you think that you have thought of everything,” famous words said by Carl Richards. Therefore, one can walk safe on the investment path by making regular checks on the scheme.
- Diversification will Eliminate Risk : This is true that spreading the investment into the different asset class will help to scatter the underlying risk making the investment less risky. But it doesn’t mean that diversification will help in eliminating the risk entirely. Every asset class has their own level of risk, and when an investment is diversified, the uncertainty gets spread and reduced, but not eliminated. Therefore, you must be aware of the fact that over-diversification is not a way to healthy investment despite the fact that it can be proved poisonous for your portfolio reducing its returns capability.
Therefore, if you have any such misconception about risks and your investment, then try building the new strategies for your investments eliminating the false fundamentals. To know various parameters of mutual fund investments and other related information, read our daily blogs and gain the unbeatable knowledge about mf investments. Moreover, get associated with us at MySIPonline for more benefits of investing online.
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