A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
Different types of risk in equity funds
Market risk is the primary risk affecting equity funds. Market risk is the risk of loss of value of securities due to a number of reasons that affect the entire stock market. So market risk is also referred to as systematic risk, i.e. risk that cannot be diversified.
Market risk can be attributed to many factors such as macroeconomic trends, the global economic crisis, geopolitical tensions or even regulatory changes. Stock price risk is the largest component of market risk affecting equity funds. When the market falls, all stock prices influence each other, which in turn affects the performance of an equity fund. In addition to the above sources of market risk, equity funds may also be subject to currency risk as one of the contributors to market risk. Currency risk is material for funds that invest in companies operating in multiple countries.
Because equity funds invest in companies from different sectors or sectors, they are exposed to industry-specific risks, namely the risk of an unfavorable development that negatively impacts companies within a sector. Equity funds can also be affected by unfavorable development around a company, such as a change in management or company policy. This is referred to as a company-specific risk. Industry and company-specific risks, also known as unsystematic risk, can be mitigated through diversification.