Understanding Market Risks Before Investing in Mutual Funds

Mutual Funds

Mutual funds are a bright investment plan for you to earn returns. But the only way one makes returns is when he/she surpasses all the risks involved in the market. Some may benefit, and some may hit the road of risks with a bag full of losses. Hence understanding these risks is necessary. So read about them below before you begin investing.

Interest Rate Risks

Interest rate risks are risks responsible for forming the unpredictable factor of the rates on returns. These rates are unique for particular markets but are visible in all markets. This is one of the main risks an investor should consider keeping in mind the amount of investment as they are closely related.

Liquidity Risk

Liquidity Risk

This refers to the inability of an investor in redeeming their investment without incurring a set of losses which hinders down the actual amount of investment. This type of risk is visible in mutual funds concerning the lock-in period.

Credit Risk

This kind of risk occurs when the issuer is unable to meet ends when they fail to pay the promised amount of interest. Although this can be avoided by checking the ranking list, uncertain factors rise during any situation.

Exchange Rates

A country’s economic and political situations play a considerable role, as they tend to influence the exchange rates. Since companies are widely exposed to interest rates, it affects the volatility of a company’s exchange rates in their race to achieve profitability.

Management Risk

Before making any investment, one should always consider the management they are approaching, especially when it comes to mutual funds. The fund management team might have the experience, but that does not mean they are risk-free.

Market Risk

Market Risk

These risks refer to the factors prevalent in the market, which may result in losses for any investor. If there is a huge let down by the market, then that could effectively affect the rates of all bonds, schemes functioning in the same market. Few reasonable examples are natural disasters, political factors, fluctuation in interest rates, etc.

Investment Objective

Investors have a clear cut idea at the back of their heads about the type of returns they require and would invest accordingly. But their analysis might fail at times as markets tend not to perform accordingly. Their investment portfolio might suit another market, whereas their amount might have been invested in a different market.

Tax Implications

There are various tax implications associated with most schemes depending upon a few factors. Individual investors have the habit of going forward with their investment plan without being aware of its tax implications, which further causes numerous problems. Avoiding tax is a considerable offense according to the law of many countries which can even be processed up to a jail term.