Avoid the biggest lie of Mutual Funds – Stop taking risks!

26 September 2018
3 min read
Avoid the biggest lie of Mutual Funds – Stop taking risks!
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“Mutual funds are subject to market risk. Read the offer documents carefully before investing”

You must have heard the disclaimer multiple times by now.

Before we delve deeper into the subject of the blog, let us first quickly take you through the risks that are involved while investing in a mutual fund.

To start with, always remember the level of risk involved in a fund depends on the underlying securities in the fund

 Following are the risks that are typically associated with a mutual fund 

Risks in mutual funds

Types of risks in mutual funds

How can you assess risk?

One of the ways of assessing risk is the volatility in returns over time.

In addition, you should take into account parameters such as beta, and standard deviation.Remember, stability remains a key. Thus, always look out for significant and frequent changes in returns generated by a fund.

If a fund’s returns varies a lot, it may be considered a high-risk investment.

Why should you take a risk?

We believe you should take a risk because mutual funds as an investment instrument provide you

1.Diversification

You can diversify your portfolio as you are not exposed to concentration to only a handful of securities.Remember, every stock is subjected to three types of risk: company risk, sector risk, and market risk.

These risks are mitigated significantly when you invest in a fund that has a portfolio of multiple securities.

2.Fund manager to the rescue

As you are aware, there’s always a fund manager and his/her team who is always on the lookout for an investment opportunity in the market.

They take informed decisions in the best interest of the fund and therefore, you can be sure that your money is in relatively secure hands.

3.Various options

In a mutual fund, an investor has the flexibility of opting for Systematic Investment Plan (SIP) that helps in rupee cost averaging of investments.

SIP also inculcates disciplined investing.

Similarly, there are options like lump sum, STP and SWP, which caters to the needs of different individuals who have different investment preferences.

What should be your approach amidst volatility?

Investing in mutual funds is not a daunting task if you are aware of the risks associated with the fund.Remember, taking calculated risks bring in gain, but taking uncalculated ones result in losses.

Some of the effective ways that can help you make the most out of your mutual fund investments are detailed as under:

1. Long-term is the way

Novice investors typically dream big and believe that with the help of mutual funds they will be able to reap huge returns. While this is true, the process doesn’t happen overnight.

With the help of compounding in SIPs, you can undoubtedly accumulate significant wealth.

But remember, patience is key.

2.Dividend matters, but not always

Investors typically think that a fund which declares a dividend is better.

However, this is not the case.

You should take into account taxation, the requirement of funds, age and risk-taking ability before opting for dividend or growth option.

Growth option typically provides higher returns over time, due to compounding.

3.Know your investments 

Remember, all mutual funds are not the same.Thus, you should check out the fund thoroughly, its composition, characteristics, pros and cons before investing.

Always try to align your objective with the fund’s objective before investing.

Conclusion

To conclude, remember that the Indian stock market is in its infancy and thus comes with significant risk.

But if you are equipped with essential information, you can become a successful investor.Also remember, you should keep your investments active for a long-term to extract healthy returns.

Should you wish to get expert assistance, feel free to connect with us.

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