Investment in mutual fund and subject to market risk

Whether we like it or not, risk is a concept we always carry with us throughout our lives. It is comparable to traffic on the road that follows our path even when we don't want it to. When farming his land, a farmer always carries the weight of several risks that surround him from every angle. Despite many risks, his objective is always to provide the best for his family and his land.

We always see this disclaimer whenever we talk about investment but have you ever thought about it. What does it mean and why this is so important "Mutual fund investments are subject to market risk. Please read all scheme-related documents carefully before investing."

1. Mutual fund investments carry risk

As I mentioned before, farmers are always at risk of water scarcity, unwelcome rain, rainy conditions, and other natural disasters, yet they continue to concentrate on their farming without sacrificing their strategies. The same goes with the market; the performance of mutual fund is correlated with the market. Mutual funds are risky because they invest in stocks, bonds, and other securities, and their value fluctuates in line with the market but that doesn’t mean they don’t give good returns. Currently, mutual fund gives 15% approx. return which is better than other investment schemes.

For Instance, Almost all mutual fund categories, including large cap, mid cap and small cap schemes, have seen massive drop in their fund’s NAV. Large cap funds have dived up to 19%, mid-caps dropped up to 21% small caps fell as much as 24% in the last 3 months i.e Jan to March 2025.

Why Mutual Fund does still makes sense?

When we establish a business, we need to raise the funds. Next, we want to see how well we are able to penetrate the market. We know that there will be risk involved, but it will eventually bring me revenue for me. The same considerations should be made when investing in mutual funds: where, when and how to invest. Despite the different risks, there are a number of advantages:

1. Diversification:

Maybe everyone’s life is messy, but whenever we go to any shop, we always see everything is divided into segments, which eases our lives to pick and see the things in a well-mannered way, and it also eases our lives to choose the best thing for us. So, here comes the concept of diversification, which plays a very pivotal role in our portfolio. Diversification helps to mitigate the risk of return, but over- diversification, which could raise issues. Therefore, it is always suggested to choose proper fund allocation according to your risk appetite.

2. Liquidity: 

The majority of people still keep their money in fixed deposits or real estate, which makes liquidity difficult. One thing should always be in mind when making investments: why we are investing. Money should be invested in such a manner that it can be readily liquidated to meet our demands as we are investing to reach our financial goal. Mostly mutual funds (especially open ended) can be easily redeemed when you need funds.

3. Professional Management:

We had our parents to look after us when we were born, teachers to help us in school, and finally college, where we encounter a wide range of individuals before deciding on our life's purpose and path. All of these things have one thing in common: we always have influential individuals to help us develop and succeed. So why aren't we reaching our financial goals? We believe we will manage our portfolio on our own, but we fail because we don't know enough about finance. For this reason, we have a fund manager who will oversee our portfolio and give us appropriate advice on how to create wealth. 

How to Manage Market Risk?

I believe it is clear from the previously mentioned instances that while we cannot ignore risk, we may reduce it with smart strategies:

• Analyze your risk appetite by asking a few questions of yourself and then accordingly decide your funds based on your financial goal.

• Diversify your portfolio across different types of funds (equity, debt, hybrid)

• Invest through SIPs (Systematic Investment Plans) to average out market fluctuations.

• Stay invested for the long term to ride out short-term volatility

Conclusion

We believe that the value of real estate will rise over time when we sell it, but we want immediate returns when we invest in other schemes, such as mutual funds or direct stocks. No investment offers you an immediate return, and if it does, there is a great deal of risk involved, which is why we never advise it. Although mutual funds are linked to the market, if you want good returns over a long period, you should definitely invest in mutual fund. The fund managers and advisors will guide you based on your risk tolerance and financial goals.  

Remember: “Risk comes from not knowing what you're doing.” – Warren Buffett

Investing in mutual funds has the potential to generate wealth over the long run. Understanding the risks is important, though, as it is with any investments. Always read all schemes related documents, understand the purpose of the fund, and match it with your own financial goals and then make investment.