Last Updated on October 24, 2020 at 11:12 am
The “mutualfundsahihai” ads are into their second innings and this time around, the young earners who dreamt of big returns appreciate that big risk comes first! So much so that AMFI now includes a line “MFs are for those who wish to understand risks” (and hopefully don’t*). There is more to mutual fund risk than the NAV going up and down each business day. These are some invisible risks that can affect your investments.
* First-time investors will never buy MFs if they knew about risks vote 78% netizens! This poll was conducted in Nov 2019, months before the crash when investors thought all they had to do was to invest each and the returns will automatically “come”. Mutual funds (or any product/service for that matter) can only be sold if investors do not stop to learn about all the risks.
Invisible risk here refers to factors that investors typically do not pay attention to or take seriously. They are visible but we choose to ignore them as we are busy with a covenient truth All these risk factors (and more) are clearly included in the scheme information document that no one reads, which makes it our first entry. This list is a mixed bad: behavioural risk, technical risk, entity risk etc.
1: Just give me returns risk: I will not reach scheme documents, I will do not do any kind of analysis, I will not invest with specific needs in mind. I will get on Google and ask, “which are the best mutual funds for 2021?”
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
2: Enticement risk: Mutual funds talk about special strategies and technologies to pick stocks and bonds in their portfolio. If you look carefully, many or at times none of these fancy statements would be present in the scheme document (the only legally binding entity)
3: Credit risk: You might think, nothing new, everyone now knows about these after so many defaults. Not so fast. To this day, you will find investors choosing debt mutual funds by their star rating; To this day you will find investors believing a portfolio with only A1+ or AAA rates bonds has no credit risk; banking and PSU bond funds are “safe” from credit risk;
4: Mass redemption risk: When unitholders collectively lose faith in the portfolio, the fund manager will have a tough time selling securities. The Franklin Fiasco was not triggered by credit risk but by the fear of credit risk. Not quite the same. In hindsight, imagine what would have happened if FT had temporarily closed the fund with SEBI’s special permission; Imagine what would have happened if SEBI had ordered the immediate shut down of the funds without the vote? If there was no litigation? Investors would have had access to a reasonable chunk of their money by now. Perhaps mistaking one risk (collective loss of faith) for the other (credit quality) is a risk in of itself! What happened to a debt fund can also happen to an equity fund.
5: Safety risk(!!): When an investor seeks a “safe option” it almost always means they have not considered all angles. Those choosing gilt mutual funds because the govt will never default fail to appreciate that the market value of GOI fluctuates day to day and can result in big losses.
6: Reinvestment risk Perhaps a type of “safety risk”. Investors who want to avoid both credit risk and market risk (as in no 5), prefer liquid funds and money market funds. Is there no risk here? Of course, there is: Invest in these for years then as interest rates gradually head lower, gains from these funds will also decrease. There is always a price to pay: sometime you see it day to day and sometimes you have to look real close.
7: Concentration risk: The active or passive fund we invest in is partial to a sector or one/two stocks. The new government is ahem less favourable to the topmost stock or they lost an antitrust lawsuit.
8: Expense ratio risk: We have seen several instances of mutual funds tactically lowering TER to invite AUM only to jack it up or at specific months in a financial year. See: Why SEBI should stop frequent mutual fund expense ratio changes
9: Riskometer risk(!!) Bizarre as it sounds, SEBI allows mutual fund risk to change each month like expense ratio!
Perhaps the regulator is as much a risk to investors as fund houses, banks, sales guys and the market. This is because “protecting the interest of investors” is not their only mandate 🙁
10: Resource risk: Be it advisors (registered or otherwise), sales guys, influencers, websites like this, media, YouTube channels etc. everyone in this game is living and learning and many do with conflicts of interests. Unless investors do their own research and take responsibility for their actions, these invisible risks will remain so. Perhaps some risks has been left out; perhaps new risks will get added in future.
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News.
Explore 1,400+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥- Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
- Our Flagship Course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
- Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle.
- Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
- Portfolio Tracker! Track your mutual funds and stock investments with our Google Sheet!
- We also publish monthly screeners for
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! On Audible: Listen to the Let's Get Rich with Pattu Podcast
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
Dr M Pattabiraman giving a lecture
- Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras.
- He has over 14 years of experience publishing news analysis, research and financial product development. He has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
- He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
- Connect with him via @pattufreefincal on X LinkedIn YouTube
- Pattabiraman has co-authored three print books.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Our publications
- Your Ultimate Guide to Travel. This is an in-depth exploration of vacation planning, including how to find affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)
- How to profit from content writing: Our ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!