Main Types of Risks in Mutual Funds
1. Market Risk
The value of your mutual fund may rise or fall depending on changes in the overall stock, bond, or money markets. Factors include economic conditions, government policies, interest rates, and global events.
2. Credit Risk
Debt and liquid funds face the risk that the issuer of a bond may default on payments. Lower-rated bonds have higher risk and can result in capital loss.
3. Interest Rate Risk
When interest rates rise, the market value of existing bonds in debt funds falls, leading to short-term losses.
4. Liquidity Risk
Some funds or securities may be hard to sell quickly, especially in tough markets, making it difficult to redeem your money at the desired time or price.
5. Inflation Risk
If your mutual fund’s returns are lower than inflation, your real (purchasing power) returns decrease.
6. Concentration Risk
If a fund focuses too much on a particular sector, company, or theme, it can be hit hard if that area underperforms.
7. Fund Manager & Operational Risk
Performance also depends on the skill and choices of the manager, as well as the fund company’s systems and processes.
How to Manage and Reduce Mutual Fund Risk
1. Diversification
Invest across asset classes (equity, debt, gold), sectors, and geographies. Avoid putting all your money in one type of fund or theme.
2. Asset Allocation
Mix funds as per your age, goals, and risk appetite—more equity when young, more debt as your goals get closer.
3. Regular Review and Rebalancing
Check your portfolio at least once a year. Move money from outperforming funds to balance out risk, and switch out of non-performers.
4. Invest for the Long Term
Short-term volatility is normal; long-term investors typically ride out market ups and downs.
5. Know Your Fund and Fees
Read the scheme documents for risk factors, past volatility, and the expense ratio—higher costs can eat into profits.
6. Use Systematic Investment (SIP)
Investing small amounts regularly can reduce timing risk and help handle market swings with less stress.
7. Set Stop-Loss Triggers (where relevant)
For advanced investors, stop-loss or target-based redemptions can help you exit before losses mount.
Conclusion
Every investment carries some risk, but smart strategies—like diversification, long-term thinking, and regular reviews—can help you enjoy the true benefits of mutual funds while keeping risks under control.