The advertisements of mutual funds (MF) disclaims – “Mutual Funds are subject to market risk. Please read the offer document carefully before investing”. The very purpose of this disclaimer is to meet the statutory requirements. Only very few people would have heard it when it is mentioned in the radio or television as it flashes by at lightning speed. In print media (Newspaper, Magazines) it is published in extremely small font. Only investors who know the statutory requirements would even be aware of the statement because the advertisements, with ‘namesake’ disclaimers, are hardly educative.
So, what is the mystery behind the ‘flash’ statement? The statement means that mutual fund scheme invests the money collected from investors in instruments which are subject to market risk. Every investor of a MF should read the offer document carefully before they invest their money with the fund house.
As an investor, you should be aware of two concepts – Market risk and Offer document.
Market risk –
What do you mean by market risk? It is the risk which can reduce the value of the investment because of market conditions. The different types of market risk are as follows – Equity risk, Interest rate risk, Currency risk, Commodity risk.
• Equity risk – This type of risk arises due to changes in 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 the foreign exchange rates.
• Commodity Risk – This type of risk arises due to changes in the commodity prices.
Offer document –
It is a document published by the mutual fund house containing very useful information about the MF scheme (risk factors, initial issue expenses, sponsor’s track record, Fund managers qualification and experience, Other MF schemes past performances launched by the mutual fund, pending litigations and penalties imposed, etc.)
The message behind the disclaimer is clear – It says that investments made by mutual funds on our behalf are not completely risk free. It is prone to all the risks that any other investment is exposed to. The message from the mutual fund house is very simple but as investors we tend to ignore this and invest in mutual fund schemes without reading it. So next time, before you think of investing do remember to read the offer document and understand the risk.