The mutual fund allows build-up of a diversified portfolio across basket of securities such as the bond and equity and due to both of the components this class of product comes with its own set of risk. The prudence is enacted sometimes by the mutual fund consultant if the investor happens to take the indirect route or in the case of purchase of direct plans he or she needs to deal with the risk factor on one's own.
So, to confront the different risk associated with mutual funds, here are some tactics discussed here forth:
Uncertain market conditions: Future life cannot be predetermined with certainty in relation to any of the circumstance let alone investments and returns from them. So as we plan for elsewhere stuff, here also to time the uncertainties in the market such that at the last juncture our investments don't jeopardize, you need to follow the asset allocation strategy.
This investment concept says that go for assessing risk profile and on that basis decide your portfolio between debt and equity, also as the investment horizon nears secure your accumulated fund.
Also during the process constant review of your profile as well as risk tolerance needs to be determined and the portfolio then needs to be rebalanced accordingly.
Credit risk: It comes with debt funds in which the interest and principal amount sometimes goes haywire. The worse is seen when the credit rating of the fund is downgraded further. For the investor, the risk brings in sharp fall in the net asset value. So, to not fall trap to the recent re-categorization and rationalization of mutual fund schemes will be a big savior as it was earlier unknown that which funds will take up credit risk or not.
In the current scheme, credit funds have now been re-christened as credit risk funds and these funds will invest 65% of their portfolio in securities that are rate AA and below. Also, as per the recent ruling, the exposure of corporate bonds to risky assets is also reduced substantially.
Market volatility: The risk is inherent with the equity class products and to remain unaffected calls for two wise steps when investing through the mutual fund route. One, opt for the systematic investment plan which provides rupee cost averaging advantage and also go for a longer tenure atleast of 5 years to free yourself from the market movements that can be alarming in a matter of time.