Just like any other investments, mutual fund investments also carry certain risk. The risk in a particular scheme of a mutual fund is basically a function of two factors:
(1) The Nature of the scheme and Market risk.
(2) Investment expertise of the Asset Management Company (AMC).
As all of us know shares are more risky than debentures.
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Thus, a scheme which invests mainly in shares (a pure growth scheme), is more risky than a scheme which invest partly in shares (Balanced Scheme), which in turn is more risky than a scheme which invests mainly in debentures (Income Scheme).
The question now is why should one invest in a growth scheme which carries more risk? The answer is that risk and return go hand in hand. If one wants more returns he has to take more risks.
These risks may be a general decline in prices of output, increase in tax rate, unfavorable government policy, economic downturn and recessionary conditions, increase in raw materials cost, interest rate, wages etc., Such factors will affect the prices of the shares in general.
These general risks associated with investments in shares are termed as “Market Risk”. It may be noted that the risk of investment in shares is reduced by investing in the shares of selected number of stable and growing industries.
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Thus, market risk can be minimized but cannot be completely eliminated even by good investment management team. However, company specific risk, known as unsystematic risk can be eliminated through proper selection of shares.
The second aspect of investment expertise is more relevant for investment in shares. As we know, some people lose money and some make money in shares. Most of us attribute this to “luck” or “chance”.
Well, it is not as simple as that: while “luck” or “chance” do have a role to play, what is more important is the investment expertise of these people and their quick action. Similarly, the investment expertises of various Mutual Funds are different and so will be the returns which they offer to the investors.