Mutual funds are subject to market risk | Advertisements for Mutual Funds

 

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Mutual funds are subject to market risk- The fund advertising amendments, as well as the proposed fund of funds rules and amendments, are expected to be available on the Commission’s Web site within the next few days. The Commission is soliciting comment on the fund of funds proposals until December 3, 2003

Advertisements for Mutual Funds (MFs) claim –

“Mutual Funds are subject to market risk. Please read the offer document carefully before investing”. The purpose of this disclaimer is to satisfy statutory requirements. Very few people would have heard it when it is mentioned in radio or television as it flashes with the speed of lightning. In print media (newspapers, magazines) it is published in very small font. Only those investors who are aware of the statutory requirements would also be aware of this statement as advertisements with ‘nominal’ disclaimers are hardly instructive.

So, what’s the secret behind the statement ‘flash’? The statement means that the mutual fund scheme invests the money collected from investors in instruments that are subject to market risk. Every investor of a mutual fund should read the offer document carefully before investing his/her money in the fund house.

As an investor, you should be aware of two concepts – market risk and offer document.

Market risk – Mutual funds are subject to market risk

What do you understand by market risk? This is the risk that market conditions can cause the value of an investment to decrease. The different types of market risk are – equity risk, interest rate risk, currency risk, and commodity risk.

• Equity risk – This type of risk arises due to changes in the stock prices in which the MF invests.

• Interest rate risk – This type of risk arises due to changes in interest rates.

• Currency risk – This type of risk arises due to changes in foreign exchange rates.

• Commodity Risk – This type of risk arises due to changes in commodity prices.

Offer Document for Mutual funds are subject to market risk

It is a document published by the mutual fund house that contains details about the MF scheme (risk factors, initial issue expenses, track record of the sponsor, fund manager qualification and experience, other MF schemes launched by the mutual fund, pending litigations and other MF schemes Very useful information. Fined, etc.)

The message behind the disclaimer is clear – it states that investments made on our behalf through Mutual Funds are not completely risk-free. It is subject to all the same risks that any other investment is exposed to. The message of mutual fund houses is very simple but as investors, we tend to ignore it and invest in mutual fund schemes without reading it. So next time, before you think of investing, do not forget to read the offer document and understand the risk involved.

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