Mutual fund investments are subject to market risk, please read all scheme related documents carefully before investing’ goes the oft-repeated statement. Like the warnings on alcohol packs, mutual fund investors tend to ignore this caution. But it is significant that as a mutual fund investor, you must aware of the risks that you are taking.
The market risks referred to in the above statement are of two types:
- Risks that you as an investor can do nothing about. Called Systematic risks, these could be political factors, exchange rate fluctuations, politics or even bad weather. Contrary to what you may have heard, these are difficult, if not impossible to predict or avoid.
- In a mutual fund, these risks are taken care of by your fund manager but you should be aware of them nonetheless. It is also known as Unsystematic risks. We can divide these into 3 broad categories – business risk, concentration risk and liquidity risk.
In this article we’ll discuss about the Unsystematic Risk that is in hands of investors.
Once you built your portfolio, 2nd phase is to know how to maintain your investments. In this article we’ll talk about how you should manage your portfolio by keeping some tips in mind:-
It is the risk is the possibility that a company will have lower than anticipated profit or may have loss rather profit.
Business Risk is influenced by numerous factors, including cut throat competition in industry, economic working environment & government regulations.
An investor can overcome this hurdle by diversify his investment across companies & sectors.
Such type of risk occurs when an investor invests his investments in a particular scheme frequently for long term. Hence they start to focus in one particular sector that loss the opportunity of diversifications. Avoid sector fund and invest in well diversified schemes.
This risk refers to selling issue of fund, in another word we can say that this risk arises if a fund can’t convert into cash quickly. Small cap funds face such type of risks.
Take help of your financial advisor &be careful while picking funds. Choose funds that suit your risk profile & investment objectives. You may also check how much time it would take to liquidate the entire portfolio. Avoid the small cap funds which have concentrated exposure in tiny stocks.
Now let’s discuss about some tips that you should follow to reducing your investment risk. Let’s go one by one……………
Being an investor, you should always try to diversify your investments & limit yourself to invest in one particular type of investment frequently. There are some options available in mutual funds i.e., equity, debt & hybrid funds. Additionally, in equity funds further options include large-cap equity funds, mid/small cap equity funds, diversified equity schemes, sectoral/thematic funds & tax saver ELSS (Equity-linked savings scheme). Similarly in case of debt funds available options are Ultra short-term funds, Liquid funds, Gilt funds etc. The best choices available to an investor of hybrid funds include balanced funds, arbitrage funds, equity-oriented hybrid funds and debt-oriented hybrid funds. Each of these subtypes invests in different types of equity or debt instruments.
Each of these provides a platform to diversify your investment well
Invest via SIP
There is a popular strategy in financial market i.e., “Timing the market” this refers that Invest when unit prices are low & redeem when the prices are high. But unfortunately timing the market required lots of skills & experience. If you are beginner then you can opt this strategy via Systematic Investment Plan commonly known as SIP. Rupee cost averaging is another benefit of SIP.
Analyze your risk profile:-
Before investing one should know his risk tolerance level, it is important to know how much risk you can tolerate for your investment. Usually young investors are more risk tolerate as they have fewer responsibilities.
About NFO (New Fund Offer):-
Young investors are usually having interest in NFO as they are available at Rs. 10. They think that it is available at low price & there is chance to make profit via timing the market strategy. But a NFO has no track records so it is very complex decision to say whether a NFO suits you or not. So if you are a beginner than you should stay away from NFO for some time.
Don’t follow herd:-
In Indian Financial Market people usually invest in bullish market when values of funds are rising rapidly & redeem in bearish market when prices are undervalued. In simple words they buy at higher price & redeem at lower price. So don’t follow herd, ask your advisor when & which fund you need to buy.
Investing for entertainment is a bad idea. You must invest for long-term. You should diversify your investment for sake of reducing risk. You should know your risk profile & invest accordingly. It is time in the market not timing which matter most in investment performance.