Mutual fund investment is known for the various advantages that investors can get when investing in this asset. In fact, because of these various advantages, investing in mutual funds is almost always a recommendation for novice investors. Some of the advantages of investing in mutual funds include stable returns, ease of use and low risk.
Stable returns on investment in mutual funds make this asset superior in terms of consistency in providing profits. Even if the amount is not large, at least the profits generated can keep the asset value from depreciating due to inflation. So that the assets/wealth stored in the form of mutual funds have the same purchasing power when used in the future.
In addition, the ease of investment offered in mutual funds allows beginners to start investing even though they have minimal knowledge of the capital market and investment in general. Because in mutual funds, investors do not need to manage their own funds, because there is already an investment manager who will allocate investment funds to potential assets, of course in accordance with the terms of the mutual fund product chosen by the investor.
Meanwhile, the low level of risk makes mutual funds safe for beginner investors who just want to try investing. Or used to save funds intended to meet needs or achieve financial goals in the future. One of them is the use of money market mutual fund assets to store emergency funds and the use of fixed income mutual funds to prepare retirement funds.
Even though it has a low risk, it does not mean that mutual fund investment is risk free. Low risk is indeed the same as the chance of experiencing a loss on investment decreases, but not the same as having no risk at all. In fact, there are several types of risks that may be accepted by investors who invest in mutual fund assets. However, this is often not realized considering that promotions about mutual funds often highlight the low side of risk and stable returns.
However buying mutual funds is one type of investment. And all investments must have a risk, even if the level is low, so it is often forgotten. Therefore, in this paper we will discuss the risks that investors may accept when investing in mutual fund assets. For further discussion, please see the description below!
Mutual Fund Investment Risks
In the previous article that discussed how to choose the best mutual funds, one of which is by reading the fund fact sheet documents, we can find that there are several main risks of investing in mutual funds in these documents. So, this shows that the risk of mutual funds does not only come from investment managers who experience default, but can also come from other sources. The main risks of investing in mutual funds are as follows:
1. Risk of changes in economic conditions
The first risk comes from changes in economic conditions. This is because economic conditions are a fundamental factor affecting financial market performance. If economic conditions worsen, this can make companies experience difficulties in carrying out their operational activities. And will result in a decrease in the value of stocks and bonds issued by these companies. So that it can trigger a decline in financial market performance in general.
Financial market conditions, which experienced a decline, had a negative impact on the performance of mutual funds. These are interrelated because mutual fund portfolios generally consist of assets or securities traded on financial markets. This is because when the assets on the financial market weaken, the performance of mutual funds also weakens.
2. The risk of decreasing the value of the investment unit
Participation unit is the smallest unit in a mutual fund that shows a person’s ownership of the funds in a mutual fund product. When an investor owns one or more units of mutual fund participation, the investor also indirectly owns a portion of the assets in the mutual fund portfolio. The number of participation units will determine the investor’s share in receiving investment returns from a mutual fund. If an investor holds 10% of the investment units in a mutual fund, then the investor will receive 10% of the profits from the total profits generated by the mutual fund portfolio. While the rest will be distributed to other investors who also have investment units.
The value of the participation unit is the Net Asset Value (NAV) divided by the outstanding participation units. Participation unit value determines the purchase price of each mutual fund unit. If the value goes up, then to invest in mutual fund assets, investors need more capital. Meanwhile, when the value drops, investors who buy units at a higher price previously will suffer losses.
A decrease in the value of the participation unit is one of the losses from mutual fund investment. This can happen because of the decline in financial market values as discussed earlier and because of the deteriorating performance of investment managers. Whether it’s because the method used by the investment manager has a low probability or because of an error in the decision made by the investment manager.
3. Liquidity risk
Low liquidity can be a risk for mutual fund investors and cause them to suffer losses. This could be caused by a market that is crashing so that there are many market participants selling out of panic. In such a situation, it is difficult to sell the asset at the desired price. And like it or not, if you want to cut losses, the investment manager must sell assets at a lower price. Automatically this causes the value of the participation unit to decrease and causes some mutual fund investors to suffer losses.
The same risk can also be caused by other things. For example, when mutual fund investors make mass withdrawals. This condition forces investment managers to sell large amounts of assets in the mutual fund portfolio. The problem is that the liquidity of financial markets such as stocks (except blue chips), bonds and money markets is not that high. So it may be difficult to sell assets in large quantities at the desired price. As a result, investment managers can only sell these assets at a lower price.
4. Default risk
Defaults or defaults can occur because issuers that issue stocks/bonds in the mutual fund portfolio experience financial problems. This generally causes the value of stocks/bonds to drop even to 0. If this happens, the value of the assets in the mutual fund portfolio can decrease significantly, which will have an impact on decreasing the value of the participation unit and causing investors to lose money.
So far, there have been many misconceptions that the risk of default is the risk of default by an investment manager company. However, investment managers actually have a lower risk of default because this institution is strictly regulated and supervised by the government. So it is less likely for investment managers to experience default.
5. Interest rate risk
Changes in interest rates can affect the performance of mutual funds, especially mutual funds whose portfolio composition consists of assets such as bonds and money market instruments. When interest rates rise, there are many investors who choose to sell their old bonds and buy the newly issued bonds. This causes the price of the bond to decrease because of the higher supply level. If the bond is one of the assets in the mutual fund portfolio, then the value of the unit of mutual fund participation may decrease. Thus making investors suffer losses.
On the other hand, if the investment manager also sells bond assets in the mutual fund portfolio, the selling price will also be lower than the price when buying the asset. And even in that scenario, a decrease in the value of the unit of mutual fund participation will still occur.
6. Market risk
Market risk refers to fluctuations that occur in financial markets. This can cause losses for mutual fund investors because mutual fund portfolios consist of assets that are traded on financial markets. So that when there is a decrease in the value of these assets, the value of the unit of mutual fund participation will also decrease.
Market risk can be triggered by changes in domestic and international economic conditions, changes in interest rates, changes in government policies and so on. For example, an economic crisis that occurs on a domestic scale can panic investors in the financial market, triggering a sell-off and crashing the financial market. This will have an impact on decreasing the mutual fund portfolio and can even cause losses to mutual fund investors.
7. Risk of changing regulations
Regulatory changes can be a risk in itself for mutual fund investors. Because changes in regulations can make investment managers change the way they allocate investors’ funds. It can even make certain fees charged to investors higher than before.
For example, when there are changes in regulations that limit mutual fund investment in certain instruments, this will make investment managers readjust the composition of assets in the mutual fund portfolios they manage. Conditions like this can have an impact on the performance of mutual funds so that the returns on mutual fund investments are not optimal. And it is even very likely to cause losses.
8. Risk of mutual fund liquidation and dissolution
Mutual fund liquidation and dissolution can occur for a number of reasons, including the fund manager’s poor performance, lack of investor interest or the fund manager’s failure to deliver the expected returns. In this situation, the assets in the investment portfolio will be sold and the proceeds will be distributed to investors according to the investment units owned.
Mutual fund liquidation and dissolution can have both losses and gains, depending on the condition of the assets at the time the situation occurred. There are times when, when liquidation is carried out, the mutual fund portfolio is in a profitable condition, so that investors continue to benefit. However, if during liquidation the asset prices in the mutual fund portfolio decrease, the investor will bear a number of losses.
So, those are the risks that might befall investors when investing in mutual fund instruments. Even so, mutual funds are assets with low risk. So these risks have a low probability of occurring.
In addition, even though these risks can occur, mutual portfolios consist of many assets for diversification purposes. Therefore, even though there is a possibility that mutual fund investors may suffer losses, the amount of losses is still relatively low compared to other types of investments on the financial market.
