Mutual Funds invest in securities that trade in different markets be it stocks, bonds, gold, or other asset classes. Any tradable security is inherently exposed to market risk i.e the value of a security is subject to fluctuations caused by market movement.
Changes in interest rate inversely affect the price of bonds and thus NAVs of debt funds. Thus, debt funds face the greatest interest rate risk. They are also exposed to credit risk (risk of the bond issuer defaulting). Some income-oriented debt funds are also exposed to inflation risk i.e the return produced by them may not compensate for the inflation experienced by the investor.
Equity Funds face market risk as they invest in stocks trading in the market and stock price fluctuations affect the NAV of these funds.
Some securities are actively traded in the market while others are not. If a Mutual Funds has invested your money in securities that are not frequently traded, the fund may find it difficult to buy or sell the security at the right time at a suitable price. This is liquidity risk that raises the cost of transactions within a fund’s portfolio, impacting your fund’s NAV.
Thus, the risk of investing in Mutual Fund depends on the type of assets it invests in.
