InvestorQ : How is Mutual Fund safe if it is subject to market risk?
nishi Shah made post

How is Mutual Fund safe if it is subject to market risk?

Shreya Karn answered.
4 years ago

Mutual funds is pool of funds used for investment. It means that MF collects funds from small and retail investor and the fund manager invest the same in to diversified investment avenues. The investment of MF generally consist of stock , debt, and Gold after understanding the fundamentals of every option and identifying the potential to grow. Equity gives growth in long-term to the MF AUM, while debt give a fixed inflow of income that eliminating the risk generated by equity in short-term. Gold investment is a hedging technique. So Mutual fund is a safe option.

Now as a rational person, one might not have so much money to invest in different avenues to avoid risk, so investing in Mutual fund gives a normal person the option to invest in diversified investment portfolio with limited fund which one holds. Also, one might have funds to invest but no professional knowledge so investment might lead to loss. With investment in Mutual fund, one get a professional allocation of their funds as the Fund manager is fully aware and professionally knowledge about to study the company’s operational work, profit and invest accordingly. Another benefit of Mutual fund is that it gives two options for investment first, one-time lumpsum investment and second investment at regular interval through SIP.

Now coming to the second part of your question, that is, Market risk. Market is unavoidable risk which one faces. For example, if you leave your home for your office at proper time so that you reach 5 minutes ahead and have being doing this for a year. But on a particular day even after taking care of extra 5 minutes, you reach office late due to some accident on road or train, or due to rain. So, where did you went wrong? Answer is, nowhere. This was due to unavoidable situation which has arised due to some external factors and not in your control. This is referred as “Market risk”. Factors like Inflation, Currency valuation, Fiscal policy, Monetary policy, and other economic factors cannot be controlled by any company and thus even after operating well and generating profit, these factors will lead the price of the company’s equity go down. As Mutual Fund also invest in stock market they cannot avoid certain risk and are subject to Market risk.