Young investors with little experience of how the Stock Market functions have a pertinent question “Is it safe to invest in Mutual Funds”? They need to know that there are risks involved in any form of investment where careful research is not carried out. It is therefore essential for you to know the types of risks that come with investing in Mutual funds so that you can stave away from them in the nick of time.
The professional investment in their individual customers’ behalf is a key activity for mutual funds (MF) companies. They are an important channel for investors who do not know much about investing and yet want to participate in stock trading. Investors benefit from expert fund allocation and can select a scheme based on their financial objectives and risk appetite. Despite the influence of steep volatility introduced in the Indian Stock Market and the imposition of long-term capital gains tax, the faith investors have in Mutual funds seems unhinged.
The Risks Involved in Investing in Mutual funds
A market is a dynamic place. The possibility of an investor facing losses due to the ever-changing market conditions is what comprises of market risks. These market risks are unavoidable, and that is why
countermeasures are suggested well in advance.
This is the possibility of an investor facing losses from a debtor’s default. Credit risk is so important, that it goes onto determining the interest rate on a loan. If a bond’s issuer cannot repay a bond, it will eventually end up being a worthless investment overall.
Liquidity risks are that which a company or a bank may experience when they are unable to meet short-term financial demands. The fund cannot sell an investment the value of which is declining. This is because there simply are no buyers.
Currency rates are ever changing. If the currency of a specific country changes, more specifically declines, then the investment loses value. This is to say that the investor will thereby lose funds.
Interest Rate Risk:
This affects fixed income securities. The interest rate risk is when the value of a fixed income security falls because of the rise in interest rates. This could inevitably lead to the investor facing losses.
How Can You Reduce the Risks of Investing in Mutual Funds?
Investing in mutual funds is not as daunting if you know the risks that come with it, and the evasive measures you can take. You have been informed of a few commonly presenting risks of mutual funds. Here, you will find some effective ways to avoid these risks and get the most out of your mutual funds.
- This is not a get-rich-quick scheme:
Rookie investors usually dream too high. They invest with an expectation of a 40-50% return, which is really quite unreasonable. With this dangerous mindset, you are more likely to invest in funds that have shown meagre and temporary performance bumps.
You need to look at returns of funds over a minimum of 5 years. At best, you can expect a 2-3% outperformance for equities and a maximum of 0.5-1% outperformance in debt funds.
- Investing in dividends:
Investors are often misled by mutual funds declaring dividends. One needs to know that in the case of a mutual fund, dividend declaration is just a book entry. Dividends, in this case, are not interest you receive but they are merely the repayment of capital.
As a matter of fact, growth option for you where you withdraw money when you need is better if looked at from a tax perspective.
- Investing without knowing investments properly:
Investors are aware that all mutual funds are not the same. Is it safe to invest in mutual funds then? Yes, it is. That, however, depends on your asset class and category of assets you invest in.
You get different returns with different mutual funds. Debt funds offer a lower but a steadier return whereas equity funds offer higher but more volatile returns.
The Question Remains: Is It Safe to Invest in Mutual Funds?
Keeping in mind the cons and the ways to avoid those cons, one could safely say that yes, it is safe to invest in mutual funds. However, this comes with a forewarning that mutual funds are a highly statistical playground. It is the one where rules keep changing. Therefore, thorough research and proper knowledge about mutual funds could help you get the best out of it, in the most risk-free manner possible.
In conclusion, understanding the Indian stock market and the many risks that come with it is essential information for an investor. If you have chosen the asset that matches your objective, you can safely trust the fund manager to steer your fund through market risks undamaged. Losses in this frontier are inevitable, and initially, one may face a few. Letting the investment to stay active for a long term is the key to extracting high yields.
Do connect with experts like OroWealth to provide skilled advisory services on the best mutual funds as per your wealth creation objectives.