Every mutual fund has its own characteristics and its risks level. It is therefore necessary to shop around to find the product that best suits your lifestyle, circumstance and expectations. Investors must be aware of the magnitude of losses they are prepared to accept and how long they are willing to keep their investment. The following can serve as a guide in choosing the ideal mutual fund.
Market Risk which occurs as a result of broader market movements which in turn depletes the value of the fund. Currency Risk is caused by adverse movements in foreign exchange relative to the denomination of the fund.
Fees: Another checkpoint for prospective investors to consider before investing in mutual funds is the fees charged. They include management fees, redemption fees and other expenses which may significantly affect returns.
Past performance: A fund’s track record can aid in investment decision making provided you remember that past returns are not a reliable guide for future performance. However past performance can tell you how volatile or stable a fund has been over a period of time which gives an indication of investment risk Other Risks Just like any other investment, mutual funds are not all rosy but comes along with some risks.
Risk profile and Investment Policy: The relationship between risk and return is inevitable, and investors seeking high returns should be prepared to take on higher risks. Investors should know their risk profile and choose funds in line with their risk appetite. This can be seen in the prospectus of the fund.
Time Horizon: The investment policy states that the minimum time recommended to keep your investment. Investors should take note of this since it’s unique to the type of mutual fund purchased. It is important to keep the capital invested for at least the recommended time horizon. Otherwise one may face penalties which may eat into the returns.
Investment Objective Risk: This is the possibility or likelihood that your intended investment objectives will not be met. It is always important that investors review their objective risk before placing any investment.
Conclusion: In selecting mutual funds it is advised to diversify by purchasing more than one product to control possible risks of a fund’s failure.
For a guiding principle; “Do not test the depth of water with both feet”.
Please remember the value of investments can go down as well as up and you may not get back the amount you initially invested. If you have any doubts about which investment product is right for you please contact your financial adviser.