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A mutual fund is a pool of securities with diverse asset classes from stocks, bonds, index funds, and debt funds. They are designed for long-term wealth building. You can choose to invest in mutual fund plans to achieve long-term financial goals.
The key to long-term wealth building is building successful mutual fund portfolios so that you can achieve early financial independence.
It requires planning, consistent investment, and strategic risk management because market risks influence the securities within a mutual fund plan.
This raises concerns among individuals about why mutual funds are so easily affected by market risks. It may also lead you to wonder how a mutual fund plan generates profits despite the market risks.
Well, let us tell you that these risks can be mitigated by implementing strategies. But for that, you should know about what the market risks are and the reason behind the market risks.
Therefore, today we will be exploring some of the reasons that can fuel market risks and why mutual funds are subject to market risks.
In addition to that, you will also learn about different types of market risks and measures to minimise the impact of the loss caused to a mutual fund plan by market risks.
Keep reading to find out everything you need to know about market risks.
The reason for market risk impacting mutual funds cannot be limited to one. Mutual funds are particularly affected due to market downturns. Market downturns are driven by broader reasons.
But first, let’s understand what market risk is and then find out the reason behind market risk.
Market risk is a certain event or possibility that affects the performance and sustainability of a financial market. Market risks mainly exist due to price changes in stocks, commodities, exchange rates, and others. An individual or an organisation may undergo losses during market downturns caused by market risks.
Market risks are classified into different types based on the nature of price change. Price volatility can occur for a variety of reasons, leading to market risk. The following are the reasons behind different types of market risks.
Market risks are driven by a broader range of factors. Market risks are not limited to stock price fluctuations or currency rate changes. Various factors contribute to market risk. In this section, you will discover various factors that contribute to market risks.
These broader factors lead to the emergence of various types of market risks. Some of the common types of market risks are given below:
These are some of the primary market risks that can arise during market downturns. Additionally, there are other market risks that arise due to specific causes.
Market risk comes in various forms. Each of its types affects various securities in a mutual fund. Here, you will find what kind of market risks the mutual fund securities are subjected to:
Overall, all the securities in a mutual fund plan are subjected to market risk in one way or another. Managing the risk is crucial to improving the performance of a mutual fund. Implementing risk assessment strategies and hedging may help to minimise the loss from these risks as well as recover from market downturns.
Market risks may not be able to be eliminated. However, by implementing several strategies, market risks can be dealt with while investing in mutual funds. The following are strategies to control market risks:
Spreading the investment across different asset classes, sectors, and geographical regions can reduce the impact of a downturn on a single investment.
Mixing equities, bonds, stocks, and cash based on the risk tolerance, financial goals, and time horizon to prevent a sudden downward in the assets. Adjust this allocation as the situation changes.
SIPs can help mitigate the market volatility in mutual funds. Cultivating the habit of investing a regular monthly amount may help to balance market fluctuations more effectively.
Determine and understand the potential risks in each of the mutual fund portfolios to balance the volatility of the funds and avoid greater risks.
Regularly monitoring and staying updated on market trends, economic changes, and geopolitical events may help to acknowledge the potential crashes in the market prior to the incident.
Investing for a long time often eliminates the drip of mutual funds. Mutual funds are generally designed to invest for a longer period of time. Long-term markets are considered to increase and generate huge profits. Opting for long-term investments has lower chances of risk.
Always consult a professional trader when in doubt. Financial advisors can provide reliable and personalised advice to navigate the market out of uncertainties.
The phrase mutual fund is subject to market risk often scares beginners. By implementing these strategies, the negative impact on mutual funds can be diminished.
So if you are wondering, whether it is a good idea to invest in a mutual fund plan? Then yes, it is a good investment plan for long-term financial goals.
Mutual fund plans are designed for long-term wealth building. Hence, mutual fund plans can overcome market downturns in the long run.
During market downturns, mutual fund performance may be impacted. However, its performance will improve over time. Because market downturns caused are not permanent. It is temporary, and the market begins to take its flight back when the problem that caused the market risk depreciates.
Investing in a mutual fund plan for a longer tenure can build your wealth at a significant rate. The historical data on stocks, bonds, and other financial instruments shows potential returns in the long run.
Data indicates that the securities eventually overcome market downturns and perform well in the long term. So, in the long run, mutual fund plans can overcome market fluctuations.
From this evaluation, we believe we have addressed all the necessary information about why mutual funds are subject to market risk. Market risks are common for investors who are into investing and trading.
As you can see, there are lots of types of market risks and several reasons to fuel these risks. However, neither of these risks is permanent.
With proper education and guidance, these market risks can be minimised to some extent. Thus, mutual funds are not affected as much as they could have been.
Implementing risk management strategies like diversification and asset allocation can prevent the impact of market risks caused by geopolitical reasons, economic issues, and others.
Therefore, becoming aware of the strategic and risk management decisions might help you learn better about mitigating the risks associated with mutual funds.
Disclaimer: The information provided in this blog is for educational and informational purposes only and should not be considered as financial or investment advice. Stock market investments are subject to market risks, and past performance is not indicative of future results. Readers are encouraged to do their own research and consult with a licensed financial advisor before making any investment decisions. The author and publisher are not liable for any financial losses or damages incurred from following the information provided in this blog.
Ibnu Jala
Ibnu Jala is an experienced professional in the financial markets of India and the Middle East, renowned for his trading expertise and mentorship. His passion for neuroscience drives his research, blending finance and science seamlessly. With a Bachelor’s in Law from India and an MBA from the UK, Ibnu Jala has a diverse academic background. In addition to being a seasoned investor and serial entrepreneur, he currently leads FinQuo Versity as its CEO.
