We all know the famous advertisement line that says, “Mutual fund investments are subject to market risk”. The possibility of market risk is always a tension for investors when making investment decisions.
Market conditions can negatively impact your investment. Therefore you should be aware of this risk when deciding whether to invest in a particular fund.
What is market risk?
Market risk arises when there is a chance for losses in investment due to changes in market conditions. It is a type of risk that is inherent in all types of investments including mutual funds.
In mutual fund investment, market risk occurs with the specific asset class or classes in which you invest your money. For example, a mutual fund that invests primarily in stocks will be more sensitive to changes in the stock market.
Strategies to avoid market risk in mutual funds
Because of market risk, the return on your mutual fund investment can decrease. But there are some strategies that you can use to avoid the possible market risks.
1. Diversification
Diversification is a strategy that involves investing in a variety of different assets within a mutual fund. An investment in a diversified portfolio can help you to minimize market risk. For example, you can invest your money in different financial instruments like stocks, bonds, gold, international funds and other securities.
2. Systematic investment plan
A systematic Investment Plan (SIP) is an investment strategy where you can invest a fixed amount of money at regular intervals in a mutual fund. The intervals can be monthly, quarterly, or bi-annually depending on your preference.
You can invest through SIP in small amounts instead of investing a lump sum amount. This will allow you to spread your investment over time and reduce the impact of market volatility. SIP will help you to achieve your long-term financial goals.
3. Long-term investing
Consider a mutual fund as a tool for long-term investment. Investing for a more extended period, consequently, allows you to protect your money from short-term market fluctuations.
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4. Consult a financial advisor
Seek the advice of a financial advisor who can help you evaluate your risk tolerance. He will guide you to select the best mutual funds that suit your investment objectives.
Before investing, you need to carefully review the prospectus of any mutual fund. Only then you can gain a full understanding of the investment strategy of the fund and its associated risks. By using the experience of the financial advisor, you can determine if a particular mutual fund is appropriate for investment.
Summary
While the above strategies can help you to reduce market risk, it is important to note that no investment is entirely risk-free. Therefore, it is crucial to understand the risks associated with mutual fund investments.
Invest only after thorough research and analysis and be very careful. You should regularly review your mutual fund holdings. You should also consider adjusting your portfolios as market conditions change.
