- May 28, 2018
- Posted by: moat_admin
- Category: knowledge center
When it comes to investment risk are unavoidable gold, real-estate, equity prices constantly fluctuates, if you seek little or no risk returns will be low and if you are ready to seek higher risk returns will be higher. However financial planners believe managing risk is essential and one of the best product to manage is it through mutual funds. So, let us understand it more clearly about how to manage it.
How do mutual funds help manage risk?
A mutual fund is an investment vehicle that allows you to invest in various asset classes, be it equity, debt or gold. Since each scheme has a number of securities in its portfolio, they provide diversification.
Investors can choose amongst the various schemes to spread their risks. When chosen properly, they act as a good asset allocation tool that helps balance risk and maximise returns.
How do MFs avoid concentration risk in your portfolio?
Many investors get carried away and over expose themselves to a particular stock, or a particular sector. By doing that, they put all eggs in one basket, thereby increasing risk. In case the stock or the sector does not perform well, the investor will lose out badly MFs help you avoid such situations as diversification is an inherent feature and they invest in well-researched stocks. Even when you are investing in sectoral or thematic funds if you are an aggressive investor, the stocks chosen are diversified even in the same sector. Therefore, even in a falling market, the impact on your portfolio will be limited.
How do SIPs help in avoiding volatility risk?
Equities are volatile by nature and investors have to be prepared for it. Macroeconomic and political events could impact markets, and there could be huge swings. As per financial planners, systematic investment plans (SIPs) is one of the best way to deal with it. In SIPs, you put small amounts of money at periodic intervals, typically every month. It helps you stagger your investments, thereby tide volatility.
How can mutual funds help you manage taxation better?
If investors do not pick investment products that beat inflation and are not tax efficient, portfolios could under perform. Fixed deposits, many other small savings are taxable. Debt funds offer indexation benefits, which reduce overall tax liability. They can also be profitable in a falling rate scenario as bond prices and interest rates move in opposite directions giving capital gains, beating inflation.
Source of information: Economic times.