What is meant by - Mutual Funds are subject to market risk?
Future is an unknown and unpredictable commodity as you can never reckon what is going to happen in the coming time. Similar is the case with mutual funds, where your invested money has to see its share of ups and downs with the sudden market fluctuations which cannot be controlled and are never completely risk-free. The disclaimer of Mutual Funds that goes as - “The Mutual Funds are subject to market risk. Please read the offer document carefully before investing,” needs to be taken into consideration before taking a step further while making investments in various fund houses. Moreover, the investors are advised to pay heed to the intricate details about a fund house as you never know about the future outcomes of investing in them.
As an investor, you need to be well-aware of the terms such as Market Risk since it is one of the basic things which needs to be thoroughly understood even if you don’t know much about investing in equity related instruments. This blog covers a detailed overview of the factors which revolve around Market Risk so that it would be easier for you to decide on the mutual funds which would suit your portfolio the best.
Defining Market Risk
Market risk is a common term used with all types of investments which results from the fluctuating nature of the market and the global economy in general terms. Market risk recognises the possibility that the market or economy will decline, causing individual investments to lose value regardless of the performance or profitability of the entity in which the money has been invested. One major incidence to get you familiar with what exactly market risk does is the stock market crash of 2008 when nearly every stock lost its value even when there was no such internal fault in most of the companies. This sudden crash could not have been predicted or prevented by any one company, except for a few in the banking sector.
Types of Marketing Risks
- Equity risk: This type of risk is associated with the investments made in the stock market. It refers to the risk when an individual is forced to sell the stock at low prices which eventually reduces the value of investment. Under this, the value of mutual funds can fluctuate, which might cause the shareholder to lose the value of their investment. Moreover, the value of stock funds varies according to the market value of portfolios, which in turn are also subject to equity risk.
- Interest rate risk: This type of risk applies to the investments made in debt securities, such as government and corporate bonds. Under this, there is a possibility that rising interest rates will cause the current bonds to become less valuable. Bond funds, market funds and balanced funds are hugely impacted under this risk factor.
- Inflation risk: As the name suggests, it is the risk which is caused due to gradual inflation which generally reduces the value of long-term investments. Money market funds suffer more under this category because their returns are pretty low.
- Sociopolitical risk: In this risk factor, events such as war, acts of terror or political elections might cause drastic impacts on the market in general. Similarly, country risk is another term which is used in parallel with sociopolitical risk and generally applies to events that impact investments in foreign countries.
While choosing a particular mutual fund the investors must look into the risk factors, initial issue expenses, sponsor's track record, Fund managers qualification and experience, to get a comprehensive idea if they are investing their money in a safe place. We, at MySIPonline, provide you with the solutions and tips to make the best use of your invested money. You can connect with our certified team of fund analysts who can guide you on the proper utilisation of your wealth to earn high profits in the future.
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