‘#AskHansi’: Why are mutual funds subject to market risks?

Mutual funds invest in debt and equity securities. In a debt security, you're basically lending money to the government or a business. In an equity security, you take a stake. Both these are for the long term. And if the mutual fund manager has assessed the risk right, you will get your money back.

But because they want to provide liquidity to investors that want to get out, all these types of securities are listed on the market where millions of investors can bid/offer and buy/sell on any given day. They can do that based on their views on the business, on the industry, on the economy, on the interest rates, on commodities on, on anything...even if they don't like the name of the company. Just because they are transacting doesn't mean the value of the business has changed. It just means that the market price has that day is.

The mutual fund has to mark to market, which means reflect that market price, which, as we said can go up and down for no good reason. So that's why they call subject to market risks.

But that does not mean that the underlying business has fallen in value.

Yahoo, in association with Hansi Mehrotra, presents ‘#AskHansi’, a new series to help you get a better grasp of personal finance and how you can invest smartly.

Hansi Mehrotra, a CFA with global experience and founder of The Money Hans, is a celebrity in the world of personal finance in India. A powerful influencer on in the corporate/banking/finance circles. She creates fine personal finance content that simplifies complex issues into easy-to-understand stuff which lay people can identify with.

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