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 firm in the UK.
What is the risk of investing in mutual funds?
We’ve all heard, “Investments in perpetual funds are subject to market risk.” Have you ever wondered what these risks are?
The image on the left talks about the various types of risks.
Not all risks have an impact on all fund schemes. The Schema Information Document (SID) helps you understand which risks apply to the selected schema.
So how does the fund management team manage these risks?
It all depends on the type of investments in which the Mutual Fund has invested. Some stocks are more sensitive to certain risks and some are exposed to others.
Professional help, diversification and SEBI regulations help mitigate risks in mutual funds.
Finally, and the most important question that many investors have asked: can a mutual fund company run away with my money? This is not possible given the structure of mutual funds and strong regulations.
