Risks Involved With Investing in Mutual Funds and How to Avoid It

Whenever you hear about investing in the mutual funds, you must have heard the disclaimer saying, “mutual funds are subject to market risk and to read the offer document before investing.” The mutual fund returns can be affected by the political situation, market decline, Economic Recession, and even weather. Such factors are not in control of the investors and are classified as systematic risks. If the fund manager allocates too much fund money into one company or sector, it is prone to concentration risk. Also, if it is unable to liquidate its funds quickly, it is called liquidation risks.

The fund house and managers usually take steps to mitigate these risks by diversifying the fund portfolio and managing its turnover ratio. However, as an investor, it is essential that you know about these risks even though they are taken care of by the fund managers professionally. Here are the few things you can do to mitigate risks involved with mutual funds’ investments –

Do Not Invest With High Expectations

When you are investing in mutual funds, you are trying to limit the risks involved with direct stock market investments. It is a good strategy, but at the same time, you should be aware of the fact that you cannot expect returns in the bracket of forty to fifty percent. There are investors with such expectations and who end up investing in mutual funds that showcase temporary high-performance but haven’t been outperforming benchmark index for the last five to ten year period. Look for consistency in the mutual fund you select. Go through the performance of the mutual fund for the last five years to select the right mutual fund that is right for you.

Do Not Invest Without Knowing the Mutual Fund Types

There are various kinds of mutual funds, depending on their underlying investment philosophy and sector in which they invest. There are mutual funds that are dedicated to debt-based investments, and there are equity-based mutual funds, and some that diversify their investments in both debt and equities. Some mutual funds invest primarily in the real estate and infrastructure while others invest in the overseas market, and so on. You should know the underlying investments of the mutual fund you are selecting and match it with your risk profile and returns expectations.

Invest in NFOs Carefully

Investing in the new fund offers is good, but you should not just go by the NAV value of the mutual fund. You should also check the performance of the fund house’s other mutual fund schemes. Also, just focusing on the NAV to calculate the value is not a good idea as it makes no difference in the long-term if it doesn’t perform. In such a case, investing in the mutual fund with higher NAV would have been much more profitable. But, even buying lower NAV that has little to no track record can also be a good investment.

Do Not Invest just for Dividends

Many mutual funds offer dividends to investors, and it is the reason most people believe that higher dividends mean that the company is good. Dividends are not interests on capital but just repayment of your investment in it. Thus, you get the option to withdraw the money when you need it, which is better for savings when you pay tax.

Even though investing in mutual funds can be beneficial, you need to be careful where and what type of mutual fund you are investing in. It is best to assess the right mutual funds and follow the right way to invest in it. You also need to keep reviewing your investments every year to ensure that you are on the right track. If you feel that your investments are not doing as good as they are supposed to, you can easily withdraw and invest in some other mutual fund. As an investor, you have the power to decide where you put your money. With the easy availability of the best direct mutual fund platform online, there is no reason why you need to hire a broker. You can try the platform and start with a small investment to understand how it works. Once you do it successfully, you will be able to make big investments too, without any issues.

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Pankaj Singh is a senior digital marketing executive having 2 years of experience in SEO, SMM, SMO, blogging, etc with a wide range of content marketing skills. He is well-qualified literate in this field.

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