Mutual Fund Investment Risks - Nationwide (2024)

FAQs

How risky is it to invest in a mutual fund? ›

Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers.

While mutual funds offer potential benefits, investors also face risks like market fluctuations. Market risk is a primary concern as the value of securities can go up or down based on changes in market conditions. A poorly performing sector or bad fund management could result in substantial losses.

What Is Downside Risk? Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

They are generally considered a safe and convenient way to grow your investments over the years. If you want to play the long-term game in mutual funds then you should know about the types of mutual funds and the advantages and disadvantages of mutual funds.

Mutual funds are managed and therefore not ideal for investors who would rather have total control over their holdings. Due to rules and regulations, many funds may generate diluted returns, which could limit potential profits.

Advisor Insight. A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.

They are suitable for aggressive investors with investment horizons of 5-10 years or more. Also, sector-specific and thematic mutual funds are also considered quite risky because of their concentration in specific industries or themes, making them susceptible to market fluctuations and sector-specific challenges.

If the fund holds bonds, then it will earn interest on them.21 However, returns are not guaranteed, and the performance of a mutual fund depends on market conditions, the fund's management, what assets it holds, and its investment strategy.

One of the prominent reasons for mutual fund loss is a need for more knowledge about the investment options and market. Individuals who invest in mutual funds without proper research often end up in a situation where they have to face a loss of money.

Can mutual funds go negative? ›

While there is loss in mutual funds due to short term market disturbances, if you look at the long term, instances of negative returns drastically reduce after 3-4 years of holding.

Potential for loss: Mutual funds are not FDIC insured and may lose principal and fluctuate in value. Cost: A mutual fund may incur sales charges either up-front or on the back end that are passed on to the investors. In addition, some mutual funds can have high management fees.

The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund's portfolio will have to lose their entire value. However, the returns from a fund can go to zero or even become negative.

Some common mistakes to avoid when investing in mutual funds include: investing without understanding the product, investing without being aware of the risk factors, not investing the appropriate amount, and redeeming too early.

Given the higher level of risk, they offer the potential for greater returns over time. The time frame for holding this type of mutual fund should be five years or more. Growth and capital appreciation funds generally do not pay any dividends.

To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.

Mutual funds with a long-term and rigid lock-in period like ELSS often come with liquidity risk. Such a risk signifies that investors often find it challenging to redeem their investments without incurring a loss.

While market crashes inevitably impact mutual funds' performance and pull them down, as an investor, you need to remain patient and avoid exiting your investment. If you redeem your investment during a market crash, you essentially convert your notional losses into actual ones.