Mutual Funds Investment: Everything You Need to Know
What is the risk of investing in Mutual Funds?
We have all heard: “Mutual Fund investments are subject to market risks.” Ever wondered what are these risks?
The image on the left talks about the various types of risks.
Not all risks impact all the fund schemes. The Scheme Information Document (SID) helps understand which risks apply to your selected scheme.
So how does the fund management team manage these risks?
It all depends on what type of investments the Mutual Fund has invested in. Certain securities are more sensitive to certain risks and some are exposed to some other.
Professional help, diversification and SEBI’s regulations help mitigate risks in Mutual Funds.
Finally, and the most important question that many investors have asked: Can a Mutual Fund company run away with my money? This is just not possible given the structure of Mutual Funds as well as the strong regulations.
Every individual investor is unique. Not only with regards to investment objectives but even in approach and view of risk. This is what makes Risk Profiling absolutely crucial before investing.
A Risk Profiler is essentially a questionnaire that seeks an investor’s answers to questions about both “ability” and “willingness”.
It is highly recommended that investors contact their Mutual Fund distributor or an investment advisor to complete this task and get to know their Risk Profile.
In Mutual Funds, one often hears, ‘more the risk, more the return’. Is there truth in this?
If ‘risk’ is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky.
In the Mutual Fund universe, a liquid fund is least risky and an equity fund is most risky.
So, the only reason to invest in equity would be an expectation of higher reward. However, higher returns come to those who invest in equity after careful study and adopting a patient, long term time horizon. In fact, risk in equity can be mitigated by adopting diversification as well having a longer term time horizon.
Every category of mutual fund schemes have different types of risks – credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. Your investment advisor and fund manager’s expertise, and diversification, can help mitigate them.
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Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in– Fixed Income Fund, Equity Fund or Balanced and which Asset Management Company (AMC) to invest with?
Firstly, discuss freely with your advisor what your objective is, what time period you’re comfortable with, and what your risk appetite is.
Decisions on which fund to invest in would be made based on this information.
- If you have a long term objective – say, retirement planning, and are willing to assume some risk, then an Equity or Balanced Fund would be ideal.
- If you have a very short term objective – say, money to be kept aside for a couple of months; a Liquid Fund would be ideal.
- If the idea is to generate regular income, then a Monthly Income Plan or an Income Fund would be recommended.
After deciding on the type of fund to invest in, a decision on the specific scheme from an AMC would have to be made. These decisions are usually made after ascertaining the AMC’s track record, suitability of scheme, portfolio details, etc.
Scheme Factsheets and Key Information Memorandum are two documents that every investor needs to peruse before investing. If one needs detailed information then one should look at Scheme Information Document. All of these are easily accessible at every Mutual Fund’s website.
Read lessMany of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills.
As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:
- You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house.
- You do not have enough time or inclination. It’s like hiring drivers even though we know how to drive.
- When you are likely to save money by outsourcing the job instead of doing it yourself. Like going on a journey driving your own vehicle is far costlier than taking a train.
- You can spend your time for other activities of your choice / liking
Professional fund management is one of the best benefits of Mutual Funds. The infographic on the left highlights all the others. Given these benefits, there is no reason why one should look at any other investment avenue.
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