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Understanding Risk

All mutual funds carry some sort of risk, you should be aware of them before investing…

I have Rs 50,000 to spare. Please let me know a fund where I can invest this sum to earn high returns. Safety is a priority for me.
- Raju Prajapati

Ideally lump-sum investing is not the best way to invest in mutual funds and you should look at investing regularly through systematic investment plans. However, before you start, you must have a financial goal or objective to achieve through the investment over a defined time period. For instance, you may have goals such as building a corpus for the down payment for a house or planning for your retirement or a child’s education. This approach will help you select a fund that will work in sync with your investment objective. You should then look for a fund that is consistent with a proven past-performance and track record.

When you invest in equity mutual funds, you are exposed to market risks. As a unit holder, you proportionately own part of the business in which the fund you own has invested in. Market risk is a multidimensional concept that manifests itself in various ways and is reflected in the volatility of the market indicators. Risk is often misunderstood as well, for instance safe investments such as bank deposits also carry risks; there is a risk that the rate you earn will not exceed the rate of inflation. All mutual funds have some form of risk or the other, you should be aware of the risks before investing in them.

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