Learn about Mutual Fund and its Features – Part 2

Who does operate & administer the Mutual Funds?

Operation and administration part of Mutual Funds is being handled by Asset Management Company. it is the responsibility of AMC to manage the invested fund in various schemes. Asset Management Company also responsible to provide other services like: advisory services, customer services, financial consulting, accounting, and sales & marketing.

AMC are basically are Portfolio managers. It appoints professional fund managers to manage the money invested by many investors in many schemes. It is appointed by trustee and sponsors. There is a signed agreement between trustees and the AMC. In this agreement the rights, duties and the functions of the AMC are mentioned.

For example: Motilal Oswal Mutual Fund is the name of the trust and it is managed by Motilal Oswal Asset management Company ltd.

What are types of risks involved in investing in Mutual Funds?

As it is very well known that Mutual Funds are subject to market risk like Volatility risk, interest rate risk, credit risk, liquidity risk etc. but the risks involved in different mutual fund schemes do not limited up to these risks only. Each scheme carries unique nature of risk including these types of risks.

Here we understand the types of risks associated with mutual funds with reference to Equity Mutual funds and Debt Mutual funds –

Types of risks involved in Equity Mutual Funds –

• Volatility Risk:

Equity Mutual Funds invest the fund in stocks and equity derivatives or equity related instruments. So the value of equity is exposed to the performance of those stocks. Generally large cap companies are less volatile than mid cap or small cap companies.

• Liquidity Risk:

To make the profit in equity market should go for long term. So it is generally difficult for equity mutual funds to buy or sell equities quick to make profit out of it, at the time of emergency. This liquidity crunch occurs when large number of investors asks to redeem their fund before the maturity date.

So to eliminate this risk most of the funds put some portion of the fund into debt market and also in money market.

Types of risks involved in Debt Mutual Funds –

• Interest Rate Risk:

It is well known fact that the bond price and the interest rate are inversely proportional to each other. When interest rate goes up, bond price comes down and vice-versa.

The impact of interest rate risk depends on the duration of investment. If it is for long-term it is more exposed to this risk than to the short-term.

• Inflation Risk:

To understand the impact of inflation risk we must understand the relation between the inflation & interest rate and Interest rate & bond price.

When inflation rate goes up interest rate also corrects to the up side. And we know that there is a inverse relation between Bond price and interest rate.

So when inflation rate increases it adversely impact the return on the debt instrument and so as of the Debt Mutual Funds. And on the other side when it reduces, the value of debt Mutual funds increases to high level.

• Credit Risk:

Amount invested in debt funds generally invest in a wide range of Bonds and Debentures of different companies. The quality of these instruments varies from company to company. Because the quality of these instruments are determined by the ratings given to them by the renowned Rating agencies like CRISIL, ICRA etc.

Bonds with high ratings provide lower return and lower rated bonds provide high returns because they are riskier than high rated bonds. But the chances of default are high with low rated bonds.

Other risks involved –

Hidden Charges – in case your fund is performing well and giving you high returns, then it is fine but if it is giving you moderate and lower return your actual return will reduce more due to the high fees involved in Mutual Funds.

Return is not insured – although mutual funds are regulated and monitored by Govt. body, but Govt does not take the responsibility of your return because all terms and conditions are already stated to you clearly in the documents and you are allowed to invest when you agree on those terms and conditions.