Can you completely avoid risks while investing in mutual funds?
Risks in mutual funds
Mutual fund managers and advisors have been trying to educate the harried investors that these risks, be it default or downgrades or economic slowdown, were always present while investing in mutual funds. It is just that they have come to front now and the investors had a first-hand experience. That doesn’t mean investors should panic and chase risk-free investments, say advisors.
Future course of action
Most advisors have been asking their clients to reassess their risk appetite and re-look at their investment choices they have made earlier. Advisors say many investors were extremely adventurous as long as the risks remained only on paper. Once the risks became a reality, they found out their true risk profile. If your risk profile is much more conservative than you had anticipated earlier, you should make changes to your mutual fund portfolio accordingly.
Risk-return trade off
You can never avoid risk completely in mutual funds. Every mutual fund scheme has some element of risk in it. Overnight funds may have the least amount of risk, while sector schemes and small cap schemes have the highest risk. If you choose the least risky products, you would end up with lower returns. So, you should try to strike a balance between the risk you are willing to take for higher returns. Don’t go overboard, but also don’t be too cautious.
Some options are not meant for you
Never overlook your risk-appetite while chasing returns to meet your goals. Most conservative investors find it extremely difficult to continue with risky investments after they experience sharp falls and extreme volatility. That is why you should never choose an option that is not in line with your risk profile. There is no point in holding a high-risk, high-return option for a brief period. Unless you stay invested for a long period, you will never pocket high returns.
Do not forget the lessons
The bleak economic scenario may improve in a few months or years. Most investors tend to forget the lessons they learnt during bleak times at that time. Do not go overboard once the sentiment turns around in the market. Always be fearful about the risks you cannot handle. No amount of return should make you overlook them.