"Mutual funds are subject to market risk." Whether an ad film on TV, an article on the internet, or a newspaper advertisement, this line is omnipresent in the context of mutual funds. It is true that mutual funds contain some risk. However, you need not fear. With the right strategies, you can mitigate mutual fund risk. Let's find out how.
Mutual Fund Risk Management – 5 Tips That Can Help
Diversify your holdings.
It is important to keep your options open, which is why it is recommended to keep your mutual fund portfolio well-diversified. Diversification is an effective mutual fund strategy that spreads risk among multiple options instead of centring it on one avenue.
Not all funds react to the market in the same manner. If some funds perform poorly, others can balance out the returns with better performance.
You can diversify your investment across asset classes, market capitalisations, sectors, etc. For instance, you can invest in debt and equity funds together or include hybrid funds to balance the high risk of equity funds with the stability of debt funds. If you are investing in equity, you can further include small, mid, and large-cap funds or invest in multi-cap funds.
You can evaluate your goals and risk appetite and diversify your portfolio accordingly.
Invest for the long-term
Investing for the long term can lower mutual fund risk. The market is generally more volatile in the short term, but it tends to settle down and offer stability over the long term. A long-term investment horizon can help ride out short-term price fluctuations and mitigate risk, especially for equity funds.
Invest through Systematic Investment Plans (SIPs)
Investing in mutual fund schemes offers two primary approaches - lump sum investments and SIPs. While lump sum investments involve a single, substantial investment, SIPs allow periodic investments at a frequency of your choice, such as monthly or weekly.
SIP enable you to leverage the concept of rupee cost averaging. Here's how it works:
Let's say you invest Rs 5,000 per month in a mutual fund scheme. In the first month, when the unit price is high at Rs 50, you purchase 100 units. However, in the following month, if the unit price falls to Rs 20, you acquire 250 units. Over time, this approach balances out the cost of your investment and lowers the associated risk.
Contrastingly, if you had chosen to invest a lump sum when the unit price was high initially, you would have obtained fewer units. Lump sum investments necessitate timing the market, which can introduce additional risk.
Use Systematic Transfer Plans (STPs)
STPs allow you to transfer your funds from one mutual fund to another of the same fund house. Similar to SIPs, they allow you to do so in instalments over time. Transferring funds from one mutual fund to another in regular instalments allows you to benefit from rupee cost averaging and lower risk.
STP eliminate the need for lump sum transfers, which can carry more risk. Instead of shifting all your money at once, you can spread it out over time. This way, if the market is high when you start, you only invest a little bit. And if the market goes down, you will be able to buy more units for the same amount of money.
Consult a financial advisor.
Getting professional guidance can help you understand how the market works. Financial advisors can recommend timely and personalised approaches to minimise mutual fund risk and maximise returns. They can educate you on the best mutual fund strategies, eliminate confusion, and even talk you out of making hasty decisions that can hinder your financial journey.
Conclusion
It is important to understand that risk is an inseparable part of the market. The market is likely to fluctuate over time and be impacted by sociopolitical and economic factors like changing governments, pandemics, inflation, interest rate hikes, wars, and more.
Rather than being apprehensive of it, aligning your mutual fund investments with your financial goals, following the above strategies, and educating yourself about how the market functions can be far more prudent.
An investor education initiative by Edelweiss Mutual Fund
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
