When we talk about mutual funds, there are two things which come simultaneously comes to our mind – Equity & Risk. Risk is the inherent feature of the equity markets and is indispensable.
Hence, one cannot separate risk from equity markets and the same is with the equity mutual funds also.
We can define equity mutual funds as those funds which generally invest a minimum 65% of its assets into equity and equity-related instruments.
KINDS OF RISK IN EQUITY MUTUAL FUNDS
Equity mutual funds may suffer from various kinds of risk. These are given below:-
Equity as an asset class is the most volatile category. And the majority of the investment by an equity mutual fund is made in equity and equity-related instruments, thereby leading to fluctuations in the NAV of the mutual funds when the markets are volatile.
In other words, if the value of the underlying security falls then NAV will also go down.
The systematic risk or the market risk is critical to each and every equity mutual fund scheme. This risk is also known as non-diversifiable risk.
PERFORMANCE/FUND MANAGER RISK
The performance of the equity mutual fund may take a hit either. It is because of the underperformance of the markets at large or due to the incapability of the fund manager.
Equity funds may be exposed to risk if most of the assets are allocated towards a particular sector. Take for example most of the assets are allocated towards the financial sector.
Now if the financial sector goes into doldrums then the fund with the highest exposure in this sector will be racked with pain.
Another risk which is not directly related to any scheme and is not within the control of any fund manager is an economic risk.
If the economy is going through tough times then equity markets do not perform in that scenario and thus all equity schemes suffer.
TYPES OF EQUITY MUTUAL FUNDS AND THEIR UNDERLYING RISK
Large Cap Schemes
These schemes are relatively safer than other equity schemes as these invest 80% of its assets in bluechip companies.
The investment in blue-chip companies protects downside risk and hence, these schemes can be a good choice if your time horizon is around 5 years.
These schemes invest 65% of its assets across companies with different market-caps and are riskier than pure large-cap schemes as these schemes also take exposure in small and midcap companies.
Mid Cap Schemes
These schemes invest 65% of its assets in mid-cap companies. And are more volatile than blue-chip companies and are generally moving on the growth trajectory. These schemes are suitable if you have a time horizon of at least 7-10 years.
These schemes are the riskiest than the above three as these schemes invest 65% of its assets in small-cap companies which are very volatile in nature.
If you want to invest in small-cap schemes then you should have a time horizon of at least 10 years.
These funds suffer from all the risks including the concentration risk as these schemes direct its assets only towards a particular sector. And it can be very risky if the sector is not performing well.
CAN YOU LOSE ALL YOUR MONEY IN A MUTUAL FUND?
We cannot ignore the fact that mutual funds are risky in nature and by risk, we mean losing invested capital.
However, there is very little or no chances that you will end up losing all your capital if you have invested through mutual funds.
This could be a case if you invest directly in equity shares but with mutual funds, the probability is very low.
The subscription for investments in mutual funds schemes is always open. Therefore it gives an opportunity to fund manager to buy stocks at every price level.
So, for a limited amount of investment, you can be a part of a big universe of mutual fund scheme. Wherein, every day some of the other investors from across all parts of India and abroad is investing their hard-earned money, which is giving the power to the fund manager to deploy the amount in the share market every day.
So, if you have a long investment horizon, then you can definitely take exposure in equity mutual funds. As these are the only asset classes which can bless you with all the needs in terms of liquidity, inflation-adjusted higher returns. And can help you in achieving your financial goals.