What are the types of risks associated with mutual funds?

Investment funds are torn between the aspirations of profit to maximize capital, and the various investment risks that stand in the way of the growth of savings or can be the cause of severe loss.

One of the fundamentals of capital management in any type of investment is taking into account the various investment risks and their causes.

In this article, we briefly explore the cause and cure, by talking about the most common types of investment risks in mutual funds, and the best tools and strategies used or recommended by economists to minimize risks and address their causes.

The general types of risks associated with investing in mutual funds:

1. Market risks

Financial markets are known for their volatility, and some violent fluctuations may pose a risk to the capital invested in the fund, as the value of traded assets decreases, causing investors to lose part of their capital.

These market fluctuations may be caused by a single factor, or by more than one factor at a time, such as: Changing interest rates that affect many investment sectors, or economic crises such as what happened during the coronavirus crisis that affected the global economy differently from one country to another, as well as geopolitical events and unrest in a region, or perhaps fluctuations in currency prices, and other factors.

2. Performance risks

By this we mean the risk associated with the performance of the fund itself compared to the expected results, or compared to market indices, and the reason for this is either the selection of unsuitable assets for investment, ineffective investment plans, failure to follow the investment plan or unplanned changes to the fund's strategy.

3. Credit risks

For example, risks associated with issuers defaulting on their financial obligations, either due to corporate bankruptcy or governments defaulting on their debts and interest payments, which can lead to significant losses for investors. Investing in bond funds is one of the most risky types of investments, as the various credit risks affecting the fund can have severe negative effects on capital.

4. Operational risks

These are often the result of human error, or flaws in the internal systems governing the fund or the company that manages it, which will naturally damage the company's reputation. Examples include miscalculations, data loss, or fraud.

What are the strategies for minimizing mutual fund risks?

Now that we have discussed the most important types of risks related to investment funds, it is important to talk about strategies to counter these risks and ways to deal with them, points that the average investor should not be ignorant of or fail to immunize his capital, in addition to the role of fund management companies in this regard.

1. Investing in multiple funds (diversification)

We mean diversification in its various forms; if the capital is suitable for diversification, such as:

• Diversification of funds (real estate funds, bonds, stocks, commodities).
• Diversification of assets within the same fund (such as real estate assets: By investing in residential, commercial, and industrial real estate at the same time).
• Geographical diversification, if possible, within some active global markets with encouraging investment performance.

2. Risk and return analysis

This is done through thorough study and careful analysis to try to estimate the benefit that can be obtained in exchange for the risks that can be encountered. Risks must be divided into acceptable, medium, and high risks, build probabilities towards each of them, compare the return that can be obtained at each level, and estimate the options available to you.

 3. Long-term investment

Investment experts advise that you should not invest in capital that you need so that you are forced to exit your investments whenever you need liquidity. It is also always advisable that your investment goals should be long-term, as long-term investments are often more beneficial than quick speculations; this is because investment markets do not usually grow overnight, and the investor should not be eager for a quick profit while overlooking the risks involved. This is not to say that flash speculation may not offer very attractive profits in some cases, but the risks associated with flash speculation are far greater than those associated with long-term investments.

3. Continuous monitoring and rebalancing of your investment

Investing in investment funds is no different from other ordinary investments in that it is necessary to follow market developments, monitor market fluctuations and positive or negative news, so it is necessary to follow the movement of investments in funds and take the necessary measures when necessary; to preserve capital and improve performance.

By rebalancing, we mean rebalancing the investment portfolio: Actions taken by the investor or fund management to keep up with market movements, by enhancing investments in some assets or withdrawing from others, depending on the new data.

4. Hiring expert financial advisors

An investor in investment funds should not neglect the use of an expert and reliable financial advisor, if the investor does not have sufficient financial and investment experience in the field he is applying for, as an expert financial advisor, through his high experience and continuous knowledge of market developments and news, may contribute by providing many important tips that help in choosing the appropriate funds and diversifying the investment portfolio according to a profitable plan.

Maximize your investment profits with Oragon funds in Turkey

With the launch of Oragon's ambitious investment funds and its significant achievements in this regard, especially in the field of real estate funds, and the establishment and management of investment funds in general, Oragon has been able to achieve an attractive investment model for investors who want to grow their capital and increase their profits.

With the safe and ambitious investment opportunities provided by Oragon through its managed investment funds, which are supervised by a group of prominent investment experts in the Turkish and regional communities, interested parties will have real opportunities to choose the best investments and achieve their investment ambitions by taking advantage of our advanced strategies, through the transparency we provide to our clients, and clearly defined investment plans.

Edited by Oragon Company ©