The subject of investment has always been quite fascinating. It offers investors the chance to make money and broaden their financial horizons. Without a doubt, since the beginning, we have all been captivated by the appeal of investing.
Additionally, making an investment decision requires taking into account a number of important factors, including your personal financial objectives, risk tolerance, and budgeting abilities. It's critical to make the right choices today because they could have a big impact on your financial future. Keep in mind who you are and the primary motivations behind your investments.
A variety of factors influence the choices and decisions of investors in the aspect of Mutual Funds. In this blog, we've compiled a list of factors affecting investment decisions and investment choices of investors.
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1. Market Risk |
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a) Interest Risk |
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b) Inflation Risk |
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c) Currency Risk |
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d) Volatility Risk |
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2. Liquidity Risk |
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3. Credit Risk |
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a) Funding Liquidity Risk |
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b) Market Liquidity Risk |
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Let us understand the various factors in detail-
Investments are always fraught with danger. For example, while Mutual Funds provide benefits such as value for money and diversification to investors, they also carry some risks.
The best thing an investor can do to reduce Mutual Fund risks is to learn more about them and practice strategies for mitigating them.
Below are the Risk Factors associated with investments that may affect a person’s investment decisions or may contribute to factors affecting investment decisions:
Many events, including those directly involving the companies whose scripts are owned by the funds, have the potential to cause the prices and income generated by the script held by Mutual Fund schemes to decline.
In general, changes in currency and interest rates, regional or global economic instability, and economic and market conditions are some of the factors.
Liquidity risk is frequently associated with Mutual Funds like ELSS that have a rigid and lengthy lock-in period. Such a risk indicates that it is frequently difficult for investors to sell their investments without suffering a loss.
For example, ELSS has a strict lock-in period during which investors are limited in what they can do with their investments. Furthermore, it can be difficult to sell investments at a time that investors deem appropriate because there are frequently not enough buyers in the market.
In Mutual Fund investments, credit risk frequently arises from a circumstance in which the issuer of the scheme fails to pay the promised interest.
Typically, fund managers include investment-grade securities with strong credit ratings in debt funds. The fund manager does, however, include lower credit-rated securities to increase the rate of returns. This action frequently increases the chance of not receiving the promised payment.
You may also want to read Risks Associated With Mutual Funds and Its Types
This is one of the most crucial factors influencing investment decisions. The ease with which an asset (such as equity shares, debentures, etc.) can be exchanged for money on the stock market is referred to as liquidity.
Liquidity risk thus represents the risks involved in such trades since the successful conversion of stock into money depends on a number of factors, including a company's book value, the bid-ask spreads for its shares on the market, etc.
High liquidity risk typically means that a particular security is difficult to buy or sell on the stock market. This is due to the possibility that an issuing company's current liabilities may prove difficult to satisfy as a result of decreased cash flow.
A good Mutual Fund is one that consistently outperforms its benchmark over the long term, as every investor is aware. The excess return is referred to as the fund's "alpha" when it exceeds the benchmark.
Most importantly, it's the hard-earned money you're investing in a mutual fund with. The fund should surpass its benchmark and generate a higher alpha, as you should anticipate. It may be the first parameter you use.
Furthermore, fund performance is important. It should be taken into account for a suitable amount of time. This is done to make sure the investments have experienced several market cycles.
This would make it possible to get a steady return over time. This is one of the most important factors that any investor takes into account while making an investment decision.
When investing in a high-return Mutual Fund, one of the first things a retail investor considers is that the return should be both high and steady.
Thus, you should avoid Mutual Funds that have recently offered very high returns but have otherwise not offered great returns, as the quality and consistency of returns of a fund are some of the factors favoring investment decisions.
This might seem like a no-brainer, but you'd be surprised at how many people invest in the wrong fund only to discover later that it doesn't meet their needs. So, please, do not commit this error. A good investor will always place a high priority on their research.
Make sure it is a mutual fund you want to invest in before you start. Don't get sucked in because you overheard your friends talking about them, even though they are a fantastic option for most people.
It's possible that you have different needs and demands from them. There is little benefit to investing in funds that don't give you security.
One of the best ways to utilize your extra income and earn some money is by investing in Mutual Funds. And there's no reason why you shouldn't make good profits as long as you maintain focus and exercise caution regarding the potential mistakes we discussed.
The factors influencing retail investors' decisions to invest in Mutual Funds were properly covered in this blog. We hope that this blog points you in the right direction and helps you get a better picture of the investing situation.
Happy Investing!