Understanding the different types of risks associated with mutual funds is essential for every investor and is one of the most important topics in the NISM Series V-A and ARN Certification Examination. Different categories of mutual funds are exposed to different types of risks depending on the securities in which they invest.
The table below provides a quick reference to the primary risks associated with various mutual fund schemes.
| Mutual Fund Scheme / Category | Primary Risk(s) | Example |
|---|---|---|
| Equity Funds | Market Risk | Stock market (Sensex/Nifty) declines sharply. |
| Sectoral/Thematic Funds | Concentration Risk, Market Risk | Banking or IT sector underperforms. |
| Small Cap Funds | Market Risk, Liquidity Risk | Small-cap stocks are highly volatile and difficult to sell during market stress. |
| Mid Cap Funds | Market Risk | Mid-cap companies experience higher volatility than large-cap companies. |
| Large Cap Funds | Market Risk (comparatively lower) | Blue-chip stocks decline during a market correction. |
| ELSS (Tax Saving) Funds | Market Risk | Equity investments fluctuate despite the tax benefit. |
| Index Funds / ETFs | Market Risk | The benchmark index falls in value. |
| International Funds | Currency Risk, Market Risk | Appreciation of the Indian Rupee reduces overseas returns. |
| Liquid Funds | Liquidity Risk (Very Low), Credit Risk (Low) | Invest primarily in money market instruments with short maturity. |
| Overnight Funds | Negligible Interest Rate Risk and Credit Risk | Invest only in one-day maturity securities. |
| Ultra Short Duration Funds | Low Interest Rate Risk | Invest in short-duration debt instruments. |
| Short Duration Funds | Interest Rate Risk | Bond prices fluctuate due to changes in interest rates. |
| Corporate Bond Funds | Credit Risk, Interest Rate Risk | Corporate bond issuer defaults or interest rates increase. |
| Credit Risk Funds | High Credit Risk | Invest significantly in lower-rated corporate bonds. |
| Banking & PSU Debt Funds | Interest Rate Risk (Low Credit Risk) | Invest mainly in debt issued by banks and public sector undertakings. |
| Dynamic Bond Funds | Interest Rate Risk | Fund manager changes portfolio duration according to interest rate outlook. |
| Gilt Funds | High Interest Rate Risk | Invest exclusively in Government Securities (G-Secs). |
| Money Market Funds | Low Credit Risk, Low Interest Rate Risk | Invest in short-term money market instruments. |
| Hybrid Funds | Market Risk, Interest Rate Risk | Combination of equity and debt investments. |
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