Mutual Fund has been one of the most sought for options by an individual when it comes to investment in the current market conditions. Investment can be very difficult, especially when you do not have much knowledge about the options available and the risk factors associated with it. Before investing, a person usually researches a bit about the investment type, to make sure that his hard-earned money is safe. For the past some time, you might have noticed the increased promotions related to Mutual Fund, which promote it as one of the low-risk options to invest for a long period. Mutual Fund are not without risk. But promotional ads, such as TV ads do not cover the entire features of the policy in a few seconds. The main reason for Mutual Fund to become one of the most popular investment types is SIP (Systematic Investment Plan). Sip allows an individual to invest in Mutual Fund through easy monthly installment which starts from as low as Rs 500 a month. Earlier, an individual had to make a yearly bulk payment which was not possible for everyone. SIP made Mutual Fund an easier plan to invest with only a little budget. This is the reason why most individuals invest in Mutual Fund when compared to other investment types.
Although it is very popular, Mutual Fund do not come with shortcomings. Some risks are only known to the people who have already invested in Mutual Fund. Mutual Fund includes a lot of companies under a portfolio for diversified investment. Although diversification reduces the risk or effect of loss in one company over others the problem arises when more than one company faces recession, loss or closure in a portfolio. This situation can lead to a huge loss in Mutual Fund. Also, it is subjected to market risk and any changes in the market will also affect the returns. One of the major problems with Mutual Fund is that there is no guarantee of profits every time. For example, if you invest any amount for five years and during that time the overall market goes into a condition where the growth is low, your investment will go into loss rather than providing your profit in return. Many individuals have faced a similar scenario in the past where they invested in Mutual Fund for a good period but never received any extra return for the investment. No matter how many companies you invest in because of diversification in the portfolio. If the overall market condition is not good, it will bring many returns. This is because the fund is mainly in the form of equity, bonds, shares, etc, which are dependent on the volatile market. To avoid this, an individual should choose the type of Mutual Fund very carefully before investing. It would be better to take the suggestion of an experienced person in Mutual Fund.
Let’s have a look at some of the risk factors that are present in Mutual Fund, but are not publicized to increase people’s investment in Mutual Fund.
- Excessive fees: Although Mutual Fund can provide you good profits in return, the fee charged can spoil some of the excitement. The average fee can start from 1%, however, many established companies are known to charge up to 5 % as well. In case the return on the principal amount is less, you will have to further give the fees or commission over it.
- Over diversification in Portfolio: Purchasing Bonds, shares and equity from many different companies can reduce the ratio of loss in investment but, if the portfolio is over diversified, the person will not be able to manage any high profit or loss securities properly. A large number of companies in a portfolio can also cause a lot of confusion while managing it.
- Self Control over the portfolio: If you are managing the Mutual Fund on your own, then you will have complete control over the securities you are choosing to invest in and manage. However, if you are paying someone to do it on your behalf like an investment broker, there is no guarantee that he will buy the stocks of the company you think will provide more profits. There is no guarantee of minimum returns as you are not able to control the portfolio directly.
- Market Up’s & Down: The most important contributor to the growth of Mutual Fund is the trend of the market. We have seen that after a certain period, the market plunges deep down to the bottom, that can cause any investment to go in loss. Mutual Fund is based on securities from the volatile market such as Stocks, Equity, UlIPS, etc which care adversely affected when the market is not performing well. So there is always a risk of loss in Mutual Fund.
- Requires time and patience: Mutual Fund are good investment options if you know about it. However, it will not give you good return overnight, You have to invest in Mutual Fund for at least 10-15 years or more to see a good return on the investment. A timeless than this will not add up a small amount to the return. Therefor Mutual Fund is not meant for people who want quick and good returns.
You might come across many TV, radio or newspaper ads that encourage you to invest in Mutual Fund with a little amount of money. However, in actual terms, investing a small amount of money in Mutual Fund will not give you a great profile. The best way to earn profits from Mutual Fund is to invest a large amount for multiple years. If the market conditions remain stable for the period, then you will get a good profit.
Secondly, please make sure not to invest all your money in just one investment scheme like Mutual Fund. Diversifying your investment will save you from loss in any one of the investment types.