Defining the risk clearly for your mutual fund investments
There is a broad market risk that all investors face. Also they are exposed to risks associated with individual investments held in their portfolios.
As investors deal with the fallout of the crisis that they have seen in a couple of debt funds wherein downgrading of its investments led to a fall in value and curb on redemptions, there is a need for them to look carefully at the overall structure of mutual funds. There are several risks that are present in a mutual fund and these needs to be identified so that there is a proper way in which one can deal with them. Not knowing about them is not a good position to be in and this can cause a lot of worry and grief at a later date. Here is a look at some of the points that are in the minds of the customers and the questions related to this that they might have.
Risk is everywhere
Anyone who believes that there are mutual fund investments where there are no risks needs to change their beliefs because every kind of fund has some risk or the other. This is true for funds ranging from debt oriented funds that invest in bonds, debentures, government securities etc to gold funds that have gold as the asset in to which they put their corpus. There might be elimination of a specific kind of risk but this does not clear all types of risk. Hence it is essential to list out which specific risk is present in a fund and what this means for their investment. More importantly one has to think about what can go wrong and how this would impact their investments at a later date. A couple of broad categorisation of risk would be as under.
Market risk
One of the types of risk that many investors would be find easy to understand is called market risk. This is the risk that due to a fall in the overall market there is a fall in the value of a particular holding. This is a type of risk over which the fund manager has little control and hence can happen anytime. A very good example to understand this position is to use an equity oriented fund. This fund might have the best companies in its portfolio but if there is a drop in the overall market then there is little that the fund manager can do because the holdings in the portfolio would have fallen and this would have led to a reduction in the net asset value for the investor. This risk is a larger risk and can happen with any asset class or holding so it is not something that can be avoided especially in the short term. This risk is higher in case of equity oriented funds because the overall market can move sharply due to various developments and this would affect the fund in a specific way.
Individual risk
The other risk that can be compared to an overall market risk is the one that is present in an individual investment. Again this can be of various types and the way to reduce this is through the route of diversification but this can cause as much damage to a fund as a market risk. In fact this kind of risk which can be a credit risk that the company that has issued some instruments as debt is unable to make repayment of the debt amount can be actually more impactful. Individual risk can arise even for equity funds where a holding can impact the whole portfolio and reduce the overall returns for the fund. This risk is often ignored but this actually needs more attention as the events of the past few days have made clear.
There is a broad market risk that all investors face. Also they are exposed to risks associated with individual investments held in their portfolios.
As investors deal with the fallout of the crisis that they have seen in a couple of debt funds wherein downgrading of its investments led to a fall in value and curb on redemptions, there is a need for them to look carefully at the overall structure of mutual funds. There are several risks that are present in a mutual fund and these needs to be identified so that there is a proper way in which one can deal with them. Not knowing about them is not a good position to be in and this can cause a lot of worry and grief at a later date. Here is a look at some of the points that are in the minds of the customers and the questions related to this that they might have.
Risk is everywhere
Anyone who believes that there are mutual fund investments where there are no risks needs to change their beliefs because every kind of fund has some risk or the other. This is true for funds ranging from debt oriented funds that invest in bonds, debentures, government securities etc to gold funds that have gold as the asset in to which they put their corpus. There might be elimination of a specific kind of risk but this does not clear all types of risk. Hence it is essential to list out which specific risk is present in a fund and what this means for their investment. More importantly one has to think about what can go wrong and how this would impact their investments at a later date. A couple of broad categorisation of risk would be as under.
Market risk
One of the types of risk that many investors would be find easy to understand is called market risk. This is the risk that due to a fall in the overall market there is a fall in the value of a particular holding. This is a type of risk over which the fund manager has little control and hence can happen anytime. A very good example to understand this position is to use an equity oriented fund. This fund might have the best companies in its portfolio but if there is a drop in the overall market then there is little that the fund manager can do because the holdings in the portfolio would have fallen and this would have led to a reduction in the net asset value for the investor. This risk is a larger risk and can happen with any asset class or holding so it is not something that can be avoided especially in the short term. This risk is higher in case of equity oriented funds because the overall market can move sharply due to various developments and this would affect the fund in a specific way.
Individual risk
The other risk that can be compared to an overall market risk is the one that is present in an individual investment. Again this can be of various types and the way to reduce this is through the route of diversification but this can cause as much damage to a fund as a market risk. In fact this kind of risk which can be a credit risk that the company that has issued some instruments as debt is unable to make repayment of the debt amount can be actually more impactful. Individual risk can arise even for equity funds where a holding can impact the whole portfolio and reduce the overall returns for the fund. This risk is often ignored but this actually needs more attention as the events of the past few days have made clear.
Happy Investing
Source:Moneycontrol.com
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