Are you also tired of hearing the same dialogue after each and every ad about mutual funds, ‘Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing!’ Have you ever wondered what makes these mutual funds so special that many people are ready to invest in it? What are these market risks which govern these mutual funds?

A mutual fund is a type of professionally managed collective investment scheme that pools money from many investors to purchase securities. While there is no legal definition of the term mutual fund, it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. So, it is basically a buffet of share and securities to choose from. When it becomes risky to invest in a particular type of securities, mutual funds give a sense of protection to the investors with higher returns than debentures or secured loans. Also, in mutual funds, there is a degree of professionalism i.e. that these mutual funds are managed by professional investment managers, which may potentially be able to offer better returns and more adequate risk management than brokers or the general public.

Market risks are risks associated with equity investment, changes in the interest rates, foreign exchange risk and commodity-related risk, if Basel guidelines are to be believed. In the context of mutual funds, these risks are broader and include some risks such as default risk, reinvestment risks etc. Market risks do exist in all investments but the key issue is how a fund manager mitigates these risks without significantly impacting the performance of the scheme of a fund. Therefore, a fund manager plays a very crucial role in selecting the stocks that will deliver to diversifying the schemes so that these mutual funds always maintain a profit margin.

There are about 300 schemes in India and with such a cut-throat competition, mutual fund investments are indeed subject to market risks but not just market risks. The person running the show has equal importance, if not more market risk. After all, it is the investor who gains maximum from these warnings and should be taken as mere jingles.