Liquidity risk is an important consideration for every investor in mutual funds. Mutual funds indeed offer so many advantages. However, this risk is always a threat to investors.
Former Chair of the U.S. Securities and Exchange Commission, Mary Jo White once said, “Investors should pay close attention to the liquidity of the funds they invest in, particularly during times of market stress.”
What is liquidity risk?
Liquidity risk is a type of financial risk. It occurs when your mutual fund assets cannot be easily converted into cash. Sometimes you may find you are not able to sell your mutual fund assets easily at a fair price. Then you are facing liquidity risk.
Why should you know about liquidity risk?
In mutual funds, you entrust your money to fund managers to invest in a diversified portfolio of assets. Understanding the liquidity risk associated with the underlying assets can help you to assess the potential risk of loss due to price volatility.
By understanding liquidity risk, you can make intelligent decisions about your investment portfolios. Moreover, assessing the overall performance of your investments becomes easier with this understanding. As a result, you can make the right investment decisions.
Gradually, you can use this knowledge to manage your risk exposure. Further, understanding liquidity risk can help you to avoid unpleasant fluctuations in the market.
How to deal with this risk?
You should carefully consider the risks associated with mutual funds when making investment decisions. Because it can have a significant impact on your returns.
To avoid liquidity risk in mutual fund investments, here are some tips you can follow:
Diversify your investments
Diversification is a strategy where you can invest your money across different types of assets such as equity, stocks, bonds, and other securities. This will help you to spread the risk and reduce the impact of any liquidity issues in a single fund.
Consider the mutual fund lock-in period
A lock-in period in a mutual fund is the specific duration during which you are not allowed to redeem or sell your mutual fund assets. The lock-in period affects liquidity. Because it limits your ability to sell your assets and access money during this time. It is important to carefully consider the lock-in period before investing in a mutual fund.
Are you looking for investments?
Kashly team can help you start your mutual fund investments with the right assistance. signup here
Monitoring the liquidity of underlying assets
Mutual fund managers can monitor the liquidity of underlying assets. They can help you to make investment decisions and avoid investments in assets that are likely to become illiquid.
Select a reputable fund house
Invest in mutual funds managed by a reputable fund house which have a track record of managing funds well. Additionally, make sure they have a good reputation in the market.
It is important to do your research before investing in mutual funds and understanding the potential risks involved. Overall, this will help you to make a wise decision regarding your investment. By following the tips mentioned above, you can reduce the likelihood of facing liquidity issues in your mutual fund investments.
