Reduce Mutual Fund Investment Risk: Apart from the fund manager, as an investor, you can adopt some methods to reduce the risk on investing in mutual funds.
Reduce Mutual Fund Investment Risk: Due to market volatility, some investors invest directly in mutual funds instead of equities. However, investing in this also involves many systematic and unsystematic risks. This can be due to not only domestic but also global reasons. Due to this, your investment may be adversely affected. Fund managers use their knowledge and experience to minimize all risks when investing in mutual funds. However, you too as an investor can adopt some methods by which you can reduce the risk on investing in mutual funds. There are many mutual fund schemes available in the market, from which you can adopt your strategy according to the suggestions given below to choose the best one for you.
Make sure to check the fundamentals of the fund
Before investing in any mutual fund, check its fundamentals. Take a look at the fund’s portfolio to see how strong it is and whether its money is invested in top companies of all sectors. Investing in funds with weak fundamentals can incur losses on your investments in the long run.
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Matching your risk with Risk-O-Meter
As per the SEBI order, the AMC (Asset Management Company) will also have to show the Risk-O-Motor for all its funds. In this, information has to be given about the level of all risk associated with the fund. Earlier, the risk-o-meter used to show the risk related to a particular category, but now the situation has changed. Before investing in any fund, check with this meter that the risk associated with which fund is matching with your risk taking ability. The level of risk is decided on several basis including liquidity risk, credit risk, interest rate risk, market cap and volatility.
Check Long Term Return
If you are choosing a fund for yourself by looking at the returns of the fund, then look at the long term returns. Some investors take their investment decisions based on short term returns but if the track record of long term i.e. 8-10 years is seen then it will help in understanding the performance of the fund in both bull and bear i.e. buy and sell conditions. Choose a fund that has consistently performed well over a period of at least 2-3 years.
Invest in large caps
Mid and small caps have the potential to get higher returns but also carry more risk. In such a situation, it is better to invest in funds associated with large caps as it performs better even during market downturns. Large caps money is invested in such companies which are dominant in their segment. If they fall during the downturn of the market, then after some time they bounce back.
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Avoid investing in all NFOs
AMCs bring New Fund Offer (NFO) to raise capital. Most of the investors are attracted to invest in NFO with high returns. However, the tendency to invest in all NFOs should be avoided. If these are new offers, then not much information about them is made public, due to which the decision should be taken carefully about investing in it. Before investing, see what’s new and how much it costs.
(Article: Rahul Jain, President & Head, Personal Wealth, Edelweiss Wealth Management)
(Disclaimer: Investing in mutual funds is subject to market risks, so consult your investment advisor before investing.)
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