NEW DELHI: Mutual funds diversify risk but they do not eliminate it. How? Let's understand this today.
So mutual fund invest in securities, equity or debt and the value of this fluctuates depending on the market movement. Mutual funds become risky because the NAV of a fund depends on the individual security value that the fund has in the portfolio. Now because mutual funds are well diversified across securities, the value of these securities going down one particular day is reduced. But that doesn't mean that the risk is completely eliminated. Now this is the angle in mutual funds that an investor needs to understand.
Mutual funds are of different categories. You have concentrated category also like a sector fund or a thematic fund where the risk is slightly more than as compared to a multi-cap or a flexi-cap which are comparatively much more diversified. What happens in a sector or thematic fund? A fund is based on a particular sector or theme. So anything happening in that particular sector impacts the fund directly and because they are concentrated in their exposure, the volatility will be more as compared to a multi-cap or a flexi-cap or any other well diversified fund.
So mutual funds definitely benefit because of diversification, which actually works like an airbag in a car accident is there.
Mutual funds are really very well diversified but then when it comes to risk they do not eliminate it, which is why you need to understand your risk appetite and accordingly you need to figure out which kind of a mutual fund is suitable for you.
(Source: ET Now)
