Every investment carries some risk, and the potential for higher returns almost always comes with higher risk. Understanding that trade-off is what helps you choose investments you can stay with through good times and bad.
The main risks in mutual funds
- Market risk: equity fund values move with the stock market and can fall sharply in the short term.
- Interest rate risk: debt fund prices fall when interest rates rise, especially for longer-duration funds.
- Credit risk: a borrower in a debt fund’s portfolio may delay or default on payments.
- Liquidity risk: some securities may be hard to sell quickly at a fair price.
- Inflation risk: “safe” investments may not keep pace with rising prices over long periods.
The riskometer
Every mutual fund scheme carries a SEBI-mandated riskometer, ranging from Low to Very High. It is a quick way to see how much risk a scheme takes – check it in the scheme documents before investing.
Matching risk to your goals
Your capacity to take risk depends on your age, income stability, existing savings and, above all, how soon you need the money. Your willingness to take risk is about how you feel when your portfolio falls. A good portfolio respects both.
- Money needed within a couple of years generally belongs in lower-risk debt or liquid funds.
- Long-term goals can usually carry more equity, because there is time to recover from market falls.
- Diversifying across asset classes and fund types reduces the impact of any one risk.
Know your risk profile
Take our free risk profile assessment – ten quick questions – and share the result with us on WhatsApp to discuss which types of funds suit you.
Mutual fund investments are subject to market risks; read all scheme-related documents carefully before investing. This article is for general information only and is not investment advice.