Risks associated with investing in mutual funds

"Mutual funds are subject to market risks. Please read related documents and schemes carefully." Ever wondered why these lines repeatedly pop up in mutual funds commercials?. Risks in mutual funds depend on what they invest in. Generally, the higher the risks, higher are the returns. Below are the few risks that mutual funds are subjected to:

  • Market risk
    Risks are there in the market. Due to this, the value of the investments done in mutual funds decline.
  • Credit risk:
    There are times when a bond issuer cannot repay the bond. This happens in the case of underlying fixed income securities of mutual funds. Thus, in such cases, the investments become worthless.
  • Interest rate risk
    When interest rates rise, the value of fixed-income securities generally fall.
  • Liquidity risk
    There are no buyers for an investment. Thus the fund will not be able to sell that investment that is declining in value.
  • Currency risk
    The investment will lose its value in case the other currency declines against Indian rupees.
Risks associated with investing in mutual funds