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Guide to Mutual Funds

Types of Risks in Popular Mutual Fund Schemes

"Mutual fund investments are subject to market risks" is a common phrase that appears at the end of all mutual fund advertisements. It implies that the value of your mutual fund assets might rise or fall depending on market circumstances, with no certainty of good returns. 

Let’s check out the different types of risks in mutual fund schemes:

  • Standard Risk Factors:

    • Investment Risks: Investing in Mutual Fund Units involves various investment risks, such as trading volumes, settlement risk, liquidity risk, and default risk, including the possible loss of principal.

    • Market Fluctuations: The price, value, and interest rates of the securities in which the scheme invests may fluctuate. So, the value of your investment in the scheme may go up or down based on market conditions.

    • Past Performance: The past performance of the Sponsor/AMC/Mutual Fund does not guarantee the scheme's future performance.

    • New Scheme Risk: If the AMC has no previous experience managing a mutual fund, there may be additional risks associated with the first scheme being launched under its management.

    • Non-Guaranteed Returns: Except for assured return schemes, the present scheme is not a guaranteed or assured return scheme.

  • Scheme-Specific Risk Factors:

    • Equity Investment Risks: Schemes investing in equities are subject to risks associated with the stock market, including market volatility, company-specific risks, and sector-specific risks.

    • Bond Investment Risks: Schemes investing in bonds are exposed to risks such as credit risk (risk of default by the issuer), prepayment risk (risk of early repayment), and liquidity risk (difficulty in selling bonds without affecting prices). 

    • Foreign Securities: If the scheme invests in foreign securities, it faces additional risks, such as currency exchange rate fluctuations, political instability, and regulatory differences.

    • Derivatives: Investing in derivatives involves risks such as counterparty risk, market risk, and leverage risk. These instruments can amplify both gains and losses.

    • Securitized Debt: If the scheme invests in securitized debt, it is exposed to risks associated with the underlying assets, such as credit risk and prepayment risk.

    • Short Selling and Securities Lending: Participation in short selling and securities lending can expose the scheme to additional risks, including the risk of losses exceeding the initial investment.

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