Growmore Mutual Fund is doing well in the capital market. However, one of its senior directors suggested that despite their fund schemes are doing good, still their operations carries various risks. Being the company sec

The fundamental reason which makes mutual fund risky lies in the fact that it puts money in a variety of investment instruments - debt, equity and corporate bonds, among others. Since the prices of these investment instruments tend to fluctuate in response to several factors, investors may be subjected to loss. In a broader sense, mutual fund risk can be categorized as- systematic risk and unsystematic risk. Following are the various risks the Mutual Fund business may have: Volatility risk Typically, equity-based funds invest in the shares of companies that are listed on stock exchanges. The value of such funds is based on companies' performance, which often gets affected due to the prevalent microeconomic factors. Credit risk Credit risk in mutual fund investment often results from a situation, wherein, the issuer of the scheme fails to pay the promised interest. In case of debt funds, typically, fund managers include investment-grade securities with high credit ratings. Liquidity risk Mutual funds with a long-term and rigid lock-in period like Equity-Linked Savings Scheme often come with liquidity risk. Such a risk signifies that investors often find it challenging to redeem their investments without incurring a loss. Concentrated risk This mutual fund risk is also prevalent among investors. It can be described as the situation when investors tend to put all their money into a single investment scheme or in one sector. For instance, investing entirely in just one company's stocks often bears a substantial risk of losing capital if caught amidst bad market situations. Inflation risk It can be best described as the risk of losing one's purchasing power, mainly due to the rising inflation rate. Typically, investors are exposed to the impact of this risk when the rate of returns earned on investments fails to keep up with the increasing inflationary rate. Also, Mutual funds may face the following risks, leading to non-satisfactory performance: Excessive diversification of portfolio, losing focus on the securities of the key segments. Too much concentration on blue-chip securities. Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and commission. Poor planning of investment returns. Unresearched forecast on income, profits and Government policies. Fund managers being unaccountable for poor results. Failure to identify clearly the risk of the scheme as distinct from risk of the market. Under performance in comparison to peers.