Mutual funds always carry a disclaimer for the investors, “mutual fund investments are subject to market risks, read all scheme related documents carefully.” However, investors must realise that the risk of investing can be undoubtedly better than the risk of letting your money stay idle. All types of investments carry a certain risk; it is only the quantum of risk that varies from investment to investment.
The investment risk in mutual funds refers to the risk of losing the amount invested, partially or completely, on account of making investment in a bad product or bad market conditions. While the investors endeavour to generate positive returns from their investments, the risk of getting negative portfolio returns is inherent to the investing world. As such instead of fearing such risk, it is always desirable for the investors that the investment risk is mitigated to the extent possible.
This can be made possible only if the investors understand the risks of investing in different mutual fund schemes as well as in various asset classes. Different asset classes have different risk-return trade-offs. This relationship of risk and return is fundamental to investing, wherein the investors taking higher risk expect to be compensated with higher returns. While equities are seen to be high-risk high return investments, debt is associated with relatively stable and consistent returns. Once the investors have gauged the investment risk embedded with different investments, a suitable asset allocation strategy must be defined to balance the portfolio risk profile and the risk appetite of the investor.
The investment trust takes care of the investment risk holistically through professional fund management under mutual funds. However, the optimal asset allocation strategy will be different for different investors, since the investors tend to have varied risk-taking abilities. Understanding investment risk is considered fundamental to investment success, as setting right expectations towards investments returns helps in a better investing experience for the investors. An aggressive investor anticipates higher returns for the investments, for he assumes the higher investment risk. On the other hand, a conservative investor would be content with low yields in return of lower risk.
The risk appetite primarily depends upon the investment horizon as well as the age of the investor. An investor will be willing to take more risks while investing towards long term goals since the money is not required in the near term. As such, the investor can afford to stay invested across short term market volatility. On the other hand, the money invested towards short term/ near-term goals would be preferred to be invested in relatively less volatile securities.
The risk appetite also shifts from being aggressive to being conservative, as one grows older. Therefore, the portfolio of a person aged 55 years would be more debt-oriented, as compared to a young investor’s portfolio, which may have a higher equity allocation.
Staying updated about the investment risk across different investments hold the key for successful financial planning, since an informed decision making and setting the right expectations for the returns from investment portfolio can help you achieve your financial goals in a time bound manner.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.