Mutual funds are subject to market risk – please read the offering document carefully before investing

Mutual Fund (MF) Ads Disclaimer: “Mutual funds are subject to market risk. Please read the offering document carefully before investing.” The very purpose of this disclaimer is to comply with legal requirements. Very few people would have heard it when it is mentioned on the radio or television as it flashes by. In print media (newspapers, magazines) it is published in extremely small print. Only investors who know the legal requirements would be aware of the statement because the ads, with ‘same-name’ disclaimers, are hardly educational.

So what is the mystery behind the ‘flash’ statement? The statement means that the mutual fund scheme invests the money raised from investors in instruments that are subject to market risk. All investors in an MF should read the offering document carefully before investing their money in the fund house.

As an investor, you should be aware of two concepts: market risk and offering document.

Market risk –

What do you understand by market risk? It is the risk that may reduce the value of the investment due to 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 the prices of the shares in which the MF invests.
• Interest rate risk – This type of risk arises due to changes in interest rates.
• Exchange rate risk: this type of risk arises due to changes in currency exchange rates.
• Commodity risk: this type of risk arises due to changes in the prices of raw materials.

Offer document –

It is a document published by the mutual fund house that contains very useful information about the MF scheme (risk factors, initial issue expenses, sponsor history, qualification and experience of fund managers, past performance of other MF schemes released by the mutual fund, pending litigation and imposed penalties, etc.)

The message behind the disclaimer is clear: It says that investments made by mutual funds on our behalf are not entirely risk-free. It is prone to all the risks to which any other investment is exposed. The message from the mutual fund house is very simple, but as investors we tend to ignore it and invest in mutual fund schemes without reading it. So next time, before you think about investing, remember to read the offering document and understand the risk.