What is the risk of investing in mutual funds?



In Pakistan very small number of people have investment accounts or investments in Mutual Funds. Mutual Funds are carefully designed portfolio and pool of investments managed by authorized Fund Managers such as UBL Fund Managers in Pakistan. You can also enjoy Tax Credits on your investments in a Mutual Fund offered by Government of Pakistan. Generally speaking, the higher the risk is involved in your investments, the more return you can get if things go well. However Mutual Funds normally offers better returns as compared to the rate of return you receive from savings in a bank, however these still presents risks associated with the pool of investments through shares and equities.

Mutual funds can offer good return but like all investments, there is always an element of risk involved. Often mutual funds are affected by events such as market conditions and so, the return can alter considerably. There is also a credit risk where a security’s issuer is unable to meet its obligation, this again will affect returns. The interest rate also plays an important role because any rise in the interest rate can result in a drop in prices of the held securities during the investment period.

Finally, there is a liquidity risk, which means that there is not a marketability of an investment, which means that it cannot be purchased or sold quickly to convert into cash with no loss. This can result in a mutual fund having to sell a security at a reduced price or even go as far as to sell many securities in the portfolio. Therefore, before investing, it is important that you understand the risks involved.