Risk Factors

Standard risk factors — mutual funds

• Mutual funds and securities investments are subject to market risks, and there is no assurance or guarantee that the objectives of any scheme will be achieved.
• The NAV of a scheme can go up or down depending on the factors and forces affecting the securities market, including fluctuations in interest rates.
• Past performance of the sponsor, the AMC or any scheme is not indicative of, and does not guarantee, the future performance of the scheme.
• The sponsor is not responsible or liable for any loss resulting from the operation of a scheme beyond the initial contribution made towards setting up the mutual fund.
• The name of a scheme does not in any manner indicate the quality of the scheme, its future prospects or its returns.

Equity schemes

• Market risk. Share prices fluctuate, sometimes sharply. Broad market falls of 30–50% have occurred historically and can occur again.
• Concentration risk. Sector, thematic and focused schemes hold fewer securities and can underperform the wider market for extended periods.
• Small and mid-cap risk. Smaller companies are more volatile and less liquid than large ones, and can fall further and recover more slowly.
• Liquidity risk. In stressed markets, securities may be difficult to sell at fair value.

Debt schemes

• Interest rate risk. Bond prices fall when interest rates rise. Longer-duration schemes are more sensitive.
• Credit risk. An issuer may default or be downgraded, reducing the value of the scheme's holdings.
• Liquidity risk. Some debt instruments trade thinly and may not be saleable at a fair price when needed.
• Reinvestment risk. Maturing holdings may have to be reinvested at lower rates.

Debt schemes are not equivalent to bank deposits and carry no capital protection.

Hybrid and index schemes

• Hybrid schemes carry the risks of both their equity and debt components, in the proportions held.
• Index funds and ETFs carry tracking error — their return may differ from that of the index they follow, because of costs and cash holdings.
• An index fund falls exactly as far as its index does. It removes fund-manager risk, not market risk.

Systematic investing

• An SIP averages the entry price but does not protect against loss, and does not guarantee a profit.
• An SWP drawing more than the portfolio earns will exhaust the corpus. The order in which returns arrive matters greatly during withdrawal.

Insurance

Insurance is the subject matter of solicitation.

• Non-disclosure of material facts — medical history, habits, occupation, existing policies — can result in a claim being rejected.
• Policies carry exclusions and waiting periods, including for pre-existing conditions.
• Room rent limits, sub-limits and co-payments can reduce the amount actually paid on a health claim.
• A lapsed policy provides no cover at all.
• Unit-linked policies carry investment risk in addition to insurance terms; the policyholder bears that risk entirely.

Loans against securities

• A fall in the value of pledged securities can trigger a margin call. If it is not met, the lender may sell the collateral, typically at the worst possible moment.
• Interest accrues regardless of how the underlying investment performs.
• Pledged units cannot be redeemed or switched until the lien is released.
• Borrowing to invest amplifies losses as well as gains.

Fixed deposits and bonds

• Corporate deposits carry credit risk. If the issuer defaults, interest and principal are at risk.
• Bank deposit insurance covers up to ₹5 lakh per depositor per bank, including principal and interest.
• Bond prices fall when interest rates rise, which matters if you need to sell before maturity.
• Interest is generally taxable at your slab rate, and TDS applies above threshold limits.

Risks common to everything

• Inflation risk. A return below inflation reduces purchasing power even when the nominal value rises.
• Tax risk. Tax rules change, and a change can alter the after-tax outcome of a long-held investment.
• Regulatory risk. Changes in regulation can affect product features and availability.
• Behavioural risk. Selling in a panic and buying in euphoria has cost Indian investors far more than any product feature.

Understand the riskometer

Every mutual fund scheme carries a riskometer with six levels — Low, Low to Moderate, Moderate, Moderately High, High and Very High. It is disclosed on the front page of the scheme document and updated monthly. Check it before you invest, and check it again if you have held a scheme for several years; a scheme's risk level can be revised.

Last updated: · Money Pathshala · ARN-000000 · Client Desk · info@moneypathshala.com · +91 95751 15624
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