I will quote 3 top risks here. A mutual fund essentially reduces risk by investing in a diversified set of stocks and bonds. It also has several controls (mandated by SEBI) built into how money is managed and invested.
Having said that there are still some risks associated that one needs to be aware of:
1. Risk of assuredly losing 1% to 1.5% of returns due to commissions. If you do NOT invest in “Direct Plans”, ie depend on a broker or a platform that makes commissions, then you lose upto 40% in the long run. With so much disinformation and misleading ads more than 90% people run this risk.
2. Risk of poor performance: If the fund you invested in does not perform well relative to others, then you lose money. While it is unlikely that a given fund will always end up in the Top 10 each year, it is also important that one tracks performance and does not end up with a lemon. A professional advisor can help in tracking this.
3. Risk of mutual funds diverging from your desired mix: Over time your mutual fund portfolio may go skewed in one direction. For example it may become overweight on equity with rising markets. Later when markets correct you may lose a significant portion. Proper asset allocaiton and rebalancing helps mitigate this risk.
Read more on the 7 Common Mistakes To Avoid While Investing in Mutual Funds.
