All individuals have financial goals that inspire them to do well in life. However, if there is one common goal across people's wish lists, we can safely say it is to accumulate wealth to be genuinely independent in life. For some individuals, it could mean having enough money to provide the best for their children, and for others, it could be to manage all emergencies without asking anyone for help.

Reaching that stage in life is an uphill task. It requires patience and commitment to save money. However, it is only the first step. You cannot accumulate wealth unless you invest it wisely and allow your money to grow. Your cash sitting in a bank will lose its value over the years due to inflation.

In recent times, mutual funds have become one of the most lucrative options for investment. They allow you to invest in stock markets in professionally-managed schemes and earn optimum returns in the long run. However, a mutual fund investment comes with a certain amount of risk. Let us understand this in detail.

[Also Read: What is Mutual Funds]

What is the Risk Associated with Mutual Funds?

Mutual funds invest your money in asset classes like equities, bonds, money market instruments, and other securities. Depending upon the asset class, mutual funds can have different risks.

We can classify this risk into six categories.

Market Risk - All types of mutual funds get affected when the market declines. However, this type of risk impacts equities more of their volatile nature. In addition, changes in SBI regulations, the performance of the company, and economic policies can also cause the value of your mutual fund investment to depreciate.

Liquidity Risk - This is a risk where the fund managers cannot sell an investment. It happens when the fund has lost its value and cannot find buyers in the market. 

Credit Risk - Associated with fixed income securities, this is the risk when a bond issuer cannot repay the bond.

Interest Rate Risk - This risk also impacts fixed income securities as their value generally declines when the interest rates increase. 

Inflation Risk - This is the risk that comes into effect when the inflation rate exceeds the rate of return on your mutual fund investment. In that case, the value of your investment may decline. 

Concentration and Rebalancing Risk - Concentration risk happens when the fund manager puts all the money into one stock or sector. Diversification is the key to healthy mutual fund investment. Most fund managers keep rebalancing the portfolio to avoid imminent risks. However, it could also lead to missed growth opportunities.

Are Mutual Funds Risky?

Despite the risks associated with mutual funds, you can rest assured because they are under the supervision of professionals who have years of experience under their belts. They have been in the industry for several years and know the intricacies of making your investments profitable. 

They do regular mutual funds calculations to identify problems and take suitable actions to maintain profitability. Moreover, they diversify the mutual fund investment of the investors to minimize the risk.

How Can You Minimise Your Mutual Funds Risk?

There are a few steps you can take to reduce mutual fund risk. Firstly, you can take the SIP path to distribute the risk. Secondly, you can diversify your mutual fund portfolio to bring the risk down to an acceptable level. As you do this, make sure that you invest in multiple asset classes and different types of equity mutual funds.

Conclusion

Despite the risk associated with them, mutual funds are an investment option that can allow you to accumulate wealth to meet your financial goals. If you are looking for a trustworthy source to invest in mutual funds at reasonable risk, visit PGIM India MF.