Archive for January, 2014

Mutual Fund Investment Risk

Friday, January 3rd, 2014

Mutual Fund Investment RiskMutual funds advertisements disclaim, “Mutual Funds are subject to market risk. Please read the offer document carefully before investing”. This disclaimer has been going on for innumerable years now just to make sure that the statutory requirements are taken care of. Only a handful of people must have heard this line when it flashes by at a speed faster than lightning on the television or radio or internet videos. In the case of print media (magazines and newspapers), it is published in such small fonts that you will have to look for it in order to read it. The advertisements are rarely educative, hence it is only the investors, who already do know the statutory requirements, who would know the full statement.

So what actually is the mystery behind this statement? This flash statement means that the money that is collected from investors is further invested by the mutual fund schemes in instruments that are “subject to market risk”. Every person investing in mutual funds must read the offer document thoroughly before they trust the fund house with their money.

So what exactly is “market risk”?

The risk that can reduce the value of the investments in the mutual funds due to market conditions is called market risk. With fluctuations in the market, value of property, gold and every type of asset goes up and comes down. The fluctuation that causes the market value to go down, and subsequently the investment value too, is referred to by this “market risk”. The various types of market risk are currency risk, interest rate risk, commodity risk and equity risk.

Currency risk: This kind of risk happens due to variations in foreign exchange rates.

Interest rate risk: This kind of risk happens because of variations in interest rates.

Commodity risk: This kind of risk happens because of commodity prices changing.

Equity risk: This kind of risk happens because of variations in stock prices. The mutual funds invest in these stock prices.