Ways To Reduce Risk In Mutual Funds

Investing in mutual funds is generally considered a safe way of investing. This is because their management is handled by experts in a very professional manner. But does this mean that mutual funds are risk-free? No, it is not. Let us understand the various risks and risks associated with them and know the ways and strategies to reduce them.

Low fund performance

Usually, investors expect the fund chosen by them to perform at the same pace as the benchmark, if not better than it. However, in many cases, the fund lags behind the benchmark and investors’ hopes are shattered. This is because not all funds manage to beat the benchmark index. This is why the possibility of underperforming the index is real.

Market risks

Mutual fund investment is associated with market risk and there is no guarantee or assurance that the fund’s objective will be achieved. The fall in the price of a stock, fund or bond fund in the short or long term is a result of market risk. Stock markets move cyclically. There are two types of periods. At one time the market can register a boom and at the other moment it can witness a decline. The good performance of the past cannot guarantee that the fund will also do well in the future and investors will get the expected returns.

Excessive diversification

Excessive diversification can occur when two or more investments overlap each other. A well-diversified portfolio includes asset classes that do not have a strong correlation and are therefore considered complementary. Spreading your investment horizon across different sectors will help prevent a close correlation between two investments and also reduce the risk of price volatility to a great extent. This is because not all industries or sectors move up or down together at the same time. Excessive diversification or expanding investments in a discriminatory manner will not help much. But it can certainly lead to losses.

Expenses

Even if a fund fails to make profits, investors still have to pay fees and other charges. Mutual fund investors have to pay a variety of fees, which come together in a package. These fees are used by fund houses to deal with marketing, distribution, processing, asset management expenses and other administrative expenses. However, SEBI has given a good news for investors that no entry code will be charged on any kind of mutual fund purchase.

Change in investment trend

The portfolio investment manager has to change its strategy with time and circumstances. On this front, the mutual fund deviates from its investment objective and style. This usually happens when the fund manager experiments with different strategies to improve performance. The result is that the risk return ratio of the fund gets disturbed.

Manager risk

When an investment manager is unable to manage his portfolio effectively, the fund may fail to reach its objectives. Apart from this, the investment style can also change due to change in the strategy of the fund manager.

Industry risk

Industry risk arises in a group of shares of a single industry or sector. In such a situation, it can be difficult if the situation related to the industry changes.

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