You must have heard in various public awareness campaigns that mutual funds are subject to market risk. There are multiple reasons that command those investor information campaigns by industry stakeholders. Mutual funds invest in a diversified portfolio of securities. The value of these securities fluctuates based on various factors, including market conditions, economic indicators, and investor sentiment. Now you must be thinking, why are they risky, after all we call them investments. Let’s find out below;
Here are some of the reasons why mutual funds are subject to market risks:
Market volatility: The overall stock market and bond market can experience significant volatility, with prices of individual securities rising and falling. This volatility can affect the value of the mutual fund’s portfolio and, consequently, the value of the units or shares held by investors.
Economic factors: Economic conditions, such as interest rates, inflation, GDP growth, and corporate earnings, can impact the performance of securities. Changes in these factors can lead to fluctuations in the value of the mutual fund’s investments.
Sector-specific risks: Mutual funds often invest in specific sectors or industries. Factors such as changes in government regulations, technological advancements, or geopolitical events can significantly impact the performance of certain sectors, leading to potential losses for the mutual fund.
Market sentiment: Investor sentiment plays a crucial role in determining market movements. Market participants’ emotions, perceptions, and behaviour can lead to exaggerated buying or selling, which can affect the overall market and, consequently, the mutual fund’s performance.
Liquidity risk: Some investments held by mutual funds may have limited liquidity, meaning they may not be easily converted into cash without affecting their market price. In times of market stress or heightened redemption requests, the mutual fund may face challenges in meeting these demands, potentially impacting its performance.
It’s important to note that while mutual funds carry market risk, they also offer the benefit of professional management and diversification. The fund managers aim to navigate market fluctuations and optimise returns over the long term. Investors should carefully consider their risk tolerance and investment objectives before investing in mutual funds or any other investment vehicle.
By staying informed about the market, you can make informed investment decisions and be prepared for market fluctuations.