Know risk profile in mutual fund

Know risk profile in mutual fund

We all have heard it: ‘Mutual fund investment is subject to market risk’, ‘Ever wondered, what are these risks?
Not all risks affect all mutual fund schemes. The Scheme Information Document (SID) is helpful in understanding which risk will apply to which of our chosen schemes.

Know Risk profile in mutual fund

How does the fund management team manage these risks?
It depends on what type of investment the mutual fund has taken. Some securities are more sensitive towards certain risks and some towards others.

Professional support, diversification, and regulation of SEBI reduce the know risk profile of Mutual Funds.

Risks in the Mutual fund

  • credit risk
  • business risk
  • market risk
  • liquidity risk

After all, the important question that many investors have asked is: Can a mutual fund company be picky about my money? If you look at the structure of mutual funds, and without strict regulation, this is absolutely impossible.

What is the relationship between risk and return?

It is often heard in mutual funds that ‘the higher in risk, higher return’. Is it true?

‘risk’ is measured as the probability of loss of capital or volatility and volatility in investment value, asset classes such as equities are undoubtedly the riskiest, and funds held in savings accounts or government bonds are undoubtedly the least risky. it happens.

Liquid funds are the least risky and equity funds are the riskiest in the mutual fund world.

Therefore, the only reason to invest in equities would be the expectation of higher returns. However, higher returns come to those who invest in equities with patience, after careful study over a long period.
In fact, risk inequities are reduced by adopting diversification as well as adopting a longer time horizon.

Each category of mutual fund schemes involves different types of risks such as credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. These can be mitigated by the expertise and diversity of your investment advisor and fund manager.

Can Mutual Funds be helpful in wealth creation?

Trade and commerce enable us to build wealth by investing our money with people who are on the path of wealth creation. We can be investors in entrepreneurial businesses by investing in stocks of different companies. 

Shareholders benefit when entrepreneurs and managers run their businesses efficiently while generating profits. In this regard, mutual funds are a great way to build wealth.

How do we know which stock to buy and when?

It is where professional help matters. Also, take advantage of the larger corpus while exploiting more opportunities. Like, a balanced diet, we need proteins, vitamins, carbohydrates, etc. Eating only one type of diet can lead to nutritional deficiencies. Similarly, in a diversified equity fund, you take in different segments of the economy and are also protected from possible volatility.

Invest in professionally managed, diversified equity funds and stay invested for a long period, so that you can build wealth for yourself and the next generation.

What type of profits should be expected from Mutual Funds?

Would your generalizing answer be the whole category? Different vehicles travel at different speeds – even in the same class, for example, a car, a car designed for urban roads will have a different maximum speed and a car designed for racing will have a different speed.

Mutual Fund is not just a product. There are also different types of different mutual funds. Investment returns for different categories may also differ, and some fund categories show a high degree of uncertainty in their performance.

If the fund invests in a market where price volatility is high, the fund’s NAV will also show large fluctuations (for example, growth fund investments in equity markets). The NAV of the fund will also be stable if invested in a market where volatility is not high (eg, liquid funds investing in the money market). In other words, liquid funds will show much less uncertainty than equity funds.

An investor would be advised to align his/her needs with the fund keeping in mind the specific nature of the fund.

Follow these 4 tips to reduce the risk associated with mutual funds

Mutual Fund Risks: The most important and effective strategy related to risk is to invest in such a profile, which matches the risk tolerance of the investor

Conventional wisdom says that it takes a risk to get good returns. But it is not at all like taking a big risk always giving you good returns. 

It’s not necessary that always taking a big risk proves to be wrong. Before doing this, one should work on such strategies, which limit the risk of investment.

1- The portfolio adapted to the risk appetite

The most effective strategy related to risk is to invest in this profile, which matches the risk tolerance of the investor. When choosing a mutual fund scheme, its time frame, financial position, risk appetite, and the financial goal should be kept in mind.
For example, individuals with a low-risk appetite and long-term financial goals can build a balanced portfolio with a beneficial mix of debt and equities.

2- Invest through Strategic Investment Plan

By using this investment option, investors can reduce the risk by sharing the risk. The investment amount is easily deducted by using features like rupee cost averaging, and compounding.

3- Investing through Systematic Transfer Plan

Moreover, this strategy makes it possible to reduce the risk associated with mutual fund investments over time and reduce the average investment cost.
Collectively, this helps in mitigating the adverse effects of entering the inflationary market. Through this, investors can switch funds to increase profits and reduce risk.

4- Diversification of Funds

To successfully balance a portfolio’s risk-reward ratio, and market risks, investments must be divided across asset classes and sectors, such as debt, cash, and equities.
Investors can include different types of funds in the portfolio depending on their risk appetite, time frame, and financial goals.

For example, investors should invest their money in debt schemes for capital protection and guaranteed returns while chasing small target goals. Alternatively, investors may prefer equity mutual funds for the long term due to their favorable risk-reward ratio.

Conclusion

Every investor is different not only in terms of investment objectives but also in their approach and relationship to risk. It makes risk profiling extremely important before investing.

A risk profile is a questionnaire in which an investor has to answer questions about both “ability” and “willingness”.

It is strongly recommended that an investor should contact their mutual fund distributor or investment advisor to complete this task and know the risk profile in Mutual fund.

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