I am 23 years old and I am a self-employed.This New Year I want to start investing in a mutual fund. I am planning to invest ₹5,000-10,000 through a Systematic Investment Plan (SIP). I am worried about risk. Does risk mean a total loss of money or only loss of profits?
- Rajesh
Like most investments, mutual funds do have risk: you could lose money on your investment. The value of your mutual fund could go up or down depending on the value of its investments. The level of risk in a mutual fund depends on what it invests in. Typically, the higher the potential returns, the higher the risk will be. That is why a debt mutual fund that invests in bonds have a lower risk, compared to an equity scheme that invests mostly in stocks. The equity scheme has the potential to offer higher returns over a long period, but it can be risky in the short term. There are also various types other risks associated with mutual funds: market risk (value of your investments decline in the market), liquidity risk (the fund can sell its investments), credit risk (the bond issuer can't pay interest or repay the money), interest rate risk (value of debt investments falls when interest rate goes up), etc.
The Securities and Exchange Board of India (Sebi) has a product labeling system for mutual fund schemes based on the risk involved. For more read: Donning New Labels.
Let us focus on your investment plan. What is the financial goal you want to achieve with this investment? Is the goal just a year or two away? Or is it a long-term goal that needs to achieved after, say, 10 years? For your short-term goals that needs to be achieved within two to three years, it is better to stick to bank deposits and debt mutual fund schemes. If your investment horizon is five to seven years, you can invest in equity mutual funds.
For more, read: First Things...
This article was originally published on January 05, 2016.
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