Many investors misunderstand the risks of mutual funds, leading to either excessive caution or overconfidence. This blog debunks common risk-related myths about mutual funds so you can invest with better knowledge.
10 Risk-Related Myths About Mutual Funds
Myth 1: Mutual Funds Are Only for Aggressive Investors
Fact: Mutual funds cater to all risk appetites. Investors can select mutual funds that match their risk appetite and financial objectives, ranging from low-risk debt to high-risk equity funds.
Example: A retiree looking for stability can invest in liquid or debt funds, while a young investor seeking growth may opt for equity funds.
Myth 2: Debt Mutual Funds Have No Risk
Fact: Debt mutual funds are not risk-free. These investments are vulnerable to interest rate fluctuations, credit defaults, and liquidity issues, impacting their profitability.
Example: If interest rates rise, the value of long-term debt fund holdings may decline, reducing the fund’s NAV.
Myth 3: Mutual Funds Never Lose Money
Fact: Mutual funds are market-linked investments and can experience negative returns, especially in short-term periods or volatile markets.
Example: Equity mutual funds investing in cyclical sectors may face losses during economic downturns.
Myth 4: Equity Mutual Funds Always Outperform Other Asset Classes
Fact: Equity funds have historically provided strong long-term returns but do not consistently outperform other asset classes. Factors such as interest rate volatility, credit risk, and liquidity constraints can influence the performance of these investments.
Example: In a recession, gold or fixed-income investments may outperform equities.
Myth 5: Mutual Funds Do Not Have Market Risks
Fact: Mutual funds, especially equity and hybrid funds, are exposed to market risks. Economic downturns, global events, and policy changes can impact their performance.
Example: A fund heavily invested in banking stocks may underperform if interest rates rise unexpectedly.
Myth 6: ELSS (Tax-Saving Mutual Funds) Have No Risk Since They Are Government-Supported
Fact: Although ELSS funds offer tax savings under Section 80C, investors should remember that they are equity-focused and subject to market fluctuations.
Example: If the stock market falls, an ELSS fund’s value may decline despite its tax-saving benefits.
Myth 7: Balanced Mutual Funds Are Completely Safe
Fact: Balanced (Hybrid) mutual funds allocate assets between equity and debt but still carry risk. Market fluctuations can impact returns, though they may be lower than pure equity funds.
Example: A hybrid fund with 60% equity exposure can experience volatility during market downturns.
Myth 8: Index Funds Are Risk-Free
Fact: Index funds track a specific market index and are subject to market risk. If the market declines, the index fund’s NAV also falls.
Example: A Nifty 50 index fund will decline if the Nifty 50 index experiences a downturn.
Myth 9: Mutual Funds with a Longer Track Record Are Always Safe
Fact: A mutual fund’s past longevity does not guarantee future stability. Performance depends on fund management, market trends, and portfolio allocation.
Example: A fund that has performed well over the past twenty years may underperform if its strategy becomes outdated or market conditions change.
Myth 10: More Funds in a Portfolio Mean Lower Risk
Fact: While diversification reduces risk, excessive diversification can dilute returns and make portfolio management difficult. Choosing quality funds is more important than holding too many funds.
Example: Investing in 15 mutual funds may not provide better risk-adjusted returns than investing in 4 to 5 well-selected funds.
Invest Wisely with VSJ FinMart
Understanding mutual fund risks helps in making informed decisions. If you need expert guidance to build a well-balanced portfolio, VSJ FinMart is here to help. We provide specialist advice to help you identify the best funds that align with your risk preferences and financial targets.
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Final Thoughts
Many people misunderstand the risks of mutual funds. Some think they are too risky, while others believe they are safe. Depending on your needs, you can select a mutual fund that corresponds to your desired risk level. Even debt funds have some risks, and equity funds do not always give high returns. The key is to invest wisely, stay patient, and not panic during market ups and downs. A well-planned investment strategy can help you manage risks better and achieve your financial goals. Happy investing!
Explore our blogs to gain deeper insights into mutual fund investing:
- 10 General Myths About Mutual Funds
- 10 SIP-Related Myths About Mutual Funds
- 10 Performance-Related Myths About Mutual Funds
- 10 Taxation-Related Myths About Mutual Funds
- 10 Investment Myths About Mutual Funds
- 10 Fund Management Myths About Mutual Funds
- 10 Redemption & Withdrawal Myths About Mutual Funds
Stay informed and invest wisely! 🚀
📢 Disclaimer
Mutual fund investments are subject to market risks, so read all scheme-related documents carefully before investing. Past performance is not indicative of future results. The information provided in this blog is for educational and informational purposes only and should not be considered investment advice. Investors should consult their financial advisors before making any investment decisions. VSJ FinMart is an AMFI-registered mutual fund distributor (MFD) that does not provide portfolio management or stock advisory services.