General

Risks associated with Mutual Funds


31, December 2025

Investments are always involved with some risks. For example, Investment tools such as mutual funds offer benefits like value-for-money and diversification to investors, but they also come with some associated risks. The most beneficial an investor can do to minimize mutual fund risks is to understand more about them and practice ways to ease the same.

What makes mutual funds so risky?

The basic reason that makes mutual fund investments risky lies in the fact that it puts money in a variety of investment instruments such as debt, equity, and corporate bonds, among others. Investors may suffer a loss since the values of these investment outcomes are prone to change in reaction to different variables.

It mainly occurs due to the fall in the NAV (Net Asset Value) of these investments. Nevertheless, mutual fund investors can make the most of the risk-reward arrangement of the investment tool by identifying the risk involved in mutual funds earlier.

Types of Risks Involved in Mutual Funds

Mutual fund risk is mainly divided into two categories:

  1. Systematic risk
  2. Unsystematic risk

The Following is a List of Risks Associated with Mutual Fund Investment

Risks involved with equity mutual fund:

  • Volatility risk- Volatility risk refers to the fluctuations in value associated with equity-based funds that invest in shares of listed companies. These fluctuations are influenced by several factors, including company performance, government directives, SEBI regulations, the economic cycle, and RBI policies. Such attributes can significantly impact stock prices, potentially leading to both increases and decreases in share value.

  • Liquidity risks- Liquidity risk is present in mutual funds like ELSS (Equity Linked Savings Scheme) that have prolonged lock-in periods. This means that investors could find it difficult to timely redeem their shares without suffering losses because they won't be able to sell during the lock-in period and there might not be enough purchasers.

GRC Shreekrish - Homes247.in

Risks involved with debt mutual fund:

  • Interest risks- Interest risk in mutual funds involves fluctuations in interest rates affecting the investment value. Changes in the interest rates will impact the price of debt instruments, such as bonds. For instance, increasing interest rates lead to lower bond prices and decreased bond value, creating uncertainty about the capital at the end of the investment period.

  • Credit risks- Credit risk in mutual funds occurs when the issuer fails to pay the promised interest. While fund managers usually include high credit-rated securities, they may also invest in lower-rated ones to increase returns. This strategy increases the risk of not receiving the expected payments, exposing investors to potential losses.

  • Inflation risks- Inflation risk is the potential loss of purchasing power due to rising inflation. Investors face this risk when their investment returns do not keep rate with inflation. For example, with a 5% return and a 3% inflation rate, the real return is only 2%, decreasing actual buying power.

  • Concentration risks- Concentration risk is also common among investors. It is defined as the circumstance in which investors often allocate all their funds to a single investment plan or industry. For example, investing fully in the stocks of a single company carries a significant risk of financial loss in volatile markets.

  • Currency risks- This risk relates to the concern that lower investment returns will result from a downfall in the exchange rate. To put it another way, it is considered that foreign currency will decline as the value of funds denominated in foreign currencies rises. The rate of return will be immediately reduced when converted to Indian Rupees.

  • Rebalancing risks- Mutual fund investments are actively managed and rebalanced to optimize performance, but this frequent adjustment can sometimes lead to missed growth opportunities. By employing smart investment strategies and careful planning, investors can manage these risks effectively and position themselves to benefit from potential growth in their portfolios.

Strategies to avoid Mutual Fund risk

One can successfully avoid the effect of mutual fund risks by following these guidelines.

  • Build a portfolio that matches your risk- Choose investments aligning with your risk tolerance and financial goals. Consider factors such as age, financial status, and risk appetite. For those with low-risk tolerance and long-term goals, a balanced portfolio of debt and equity offers a suitable, risk-mitigated solution.

  • Invest through STP (Systematic Investment Plan)- With this investment way, investors will be able to distribute the risk burden significantly. Also, with the help of features like rupee cost averaging and the power of compounding, investors can reduce their cost of investment successfully.

  • Profile diversification- To balance risk and reward, diversify investments across asset classes like debt, equities, and cash equals. Align your portfolio with your risk appetite, time horizon, and financial goals. For short-term goals, focus on debt schemes for safety and guaranteed returns; for long-term goals, consider equity funds for higher potential growth.

As a result, we can concluded that mutual funds will always carry some risk. However, by using clever investing strategies, investors may reduce the impact of the same and keep their cash from depleting.

Also Read: High Value Transactions and Income Tax

Trending Blogs

Other General Blogs

21/1, Cunningham Rd, Shivaji Nagar,
Bengaluru, Karnataka 560001

+91 9164247247 (9:30 AM - 7:30 PM)
e-mail : enquiry@homes247.in

Stay Connected

Copyright © 2018 VSNAP Technology Solutions Pvt Ltd | All Rights Reserved.