Are Mutual Funds completely risk-free?

14 May 2022  Read 1276 Views

Let's Offend:
Generally, when things go south in a marriage of  two people, there’s at least some alimony involved. But what do 50 million Mutual Funds Investors get when the market hits rock bottom? Baba ji ka?

We end up spending on gold, real estate, and insurance without thinking about price drops or missed opportunities (as with the case of insurance). We don't want to take chances in the stock market.
Whenever it comes to SIP Mutual Funds, however, we frequently take chances. We invest, and even if we lose money, we continue to invest for the long run.

However, due to the variety of equities, it has a lower risk than straight equity ownership. Basically, the fund managers in mutual funds divide your money among numerous firms based on the funds you've picked. Even when a commodity does not perform well, it will have little impact on your portfolio. As a result of diversity, the risk is reduced.

It has a lesser risk than plain equity ownership because of the range of stocks. In SIP mutual funds, the fund managers distribute your money among several businesses operating on the funds you choose. Even if a commodity performs poorly, it will have very little effect on the portfolio. Risk is minimised as a consequence of variety.

Risks involved in SIP and SWP Mutual Funds

When investing in a mutual fund, you have two main concerns: will you be able to collect adequate capital gains without losing money, and will the asset management organisation that manages the pooled assets be reliable. For the latter, the Securities Exchange Bureau of India (SEBI) as well as the Association of Mutual Funds in India oversee and supervise all domestically operated mutual funds.

1. Stock Market or Equity Risk
The money you put into an equity investment is eventually invested in the equities of publicly traded firms. As a result, equity SIP investment plan mutual funds, or any fund having a portion of its assets invested in stocks, are exposed to the hazards of stock markets. It is also the risk posed by the market's volatility character, in which stock values fluctuate for a variety of causes. Foreign or domestic factors might be at play.

2.     Credit Hazard
All SWP and SIP Mutual Funds investors are exposed to this risk. Credit funds invest in debentures and bonds, which are fixed-income products. The borrower (usually firms and governments) is the bearer of these securities, while the mutual fund is the lending provider. When a borrower or issuer takes out a loan, they commit to returning the principal and interest on the agreed-upon timetable.

3. Risk of Interest Rates
A risk linked with debt funds is interest rate risk. Bonds are exchanged in the same way that stocks are, and their prices fluctuate. The movement in bond markets is mostly influenced by the economy's interest rates. The link between the rate of interest and bond rates is inverse. As a result, as the economy's interest rates rise, the values of current bonds fall because they continue offering the same interest rates.

4. Risk of Inflation
Inflation is defined as an increase in the overall quantity of pricing for the products and services we use. It reduces the budget's buying power.

Top considerations for evaluating mutual fund safety

The risk is the second significant issue when dealing with a SIP and SWP mutual fund. When it comes to mutual funds, there is some risk involved because their performance is connected to market volatility. However, while assessing the risk of numerous mutual fund schemes, there are several things to consider:

1. Returns
A very well managed fund may produce investment income of up to 12%, which is roughly twice as much as typical financial vehicles such as fixed or recurring deposits. The primary goal of a mutual fund scheme is to profit from the securities markets by earning significant returns. In effect, this enables shareholders to prepare for particular investment goals such as their children's education, family vacations, home purchases, planning for retirement, and so on.

2. Factor of Uncertainty
Because they account for unpredictability, mutual fund investments employing a systematic investment strategy (the popular one among owners) are safer. What if a family member has a medical emergency and the investor is unable to contribute the SIP mutual funds amount for just that month? In this case, the investor can suspend the SIP and resume investing whenever they have sufficient cash. You may not have enough funds to put in a recurring (RD) or fixed deposit (FD) during a given month, however, your recurring deposit will be terminated.

3. There Is No Need For Loan
Assume an investor has already contributed to a SIP investment fund mutual fund for 10 years and has reaped substantial capital gains. However, the investor now wants to send their kids to higher study overseas. The bank charges the investor a hefty interest rate (12 percent in some situations) on an education loan. What about when the investor didn't have had to take out a loan at all? All they'd want to do is remove from the bond fund they'd been contributing to and utilise the capital gains (which might be as high as 12 percent) to pay for their children's education.

4. Tax Advantages
In compared to a set of financial alternative investment plans, mutual funds are tax-efficient. Long- and short profits from mutual funds are taxed, ensuring that investors do not pay a major portion of their returns in taxes. Furthermore, some mutual funds, such as the capital savings plan, or ELSS, are intended expressly for tax benefits.

Bottom Line

Investors of SIP and SWP Mutual Funds are constantly exposed to these dangers. You cannot prevent such dangers, since they are beyond your control. External causes are to blame. All you could do is control or limit the risk by devising various investing techniques. One typical method is diversification. You can invest in equity assets through mutual funds if you want larger returns. You can also invest in debt funds, which provide low risk and poor returns, if you have a low-risk appetite and yet want a good investment portfolio. Furthermore, you may buy hybrid mutual funds to get a good balance of both.

About the Author: Shivangi Shrivastava | 6 Post(s)

A content writer and social media content creator with 6+ years of experience giving voice to 40+ brands worldwide. I love to craft written, audio, video, and graphics content on multiple domains.

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