What r the market risks involved in mutual fund investment banking?

i didnt really understand the offer documents that clearly.so anyone,it will be helpful if someone would explain the risks in detail.also is it advisable to deposit a huge amount as mutual fund?
i am a science person and clearly nil in the knowledgs of banking

The 1st responder's answer is exactly correct. If you put a large amount into a mutual fund that invests in equity investments and the stock market collapses, then you will loose money. That is the simple answer.

Mutual funds are not all the same and they do not make the same investments. Some have a much greater amount of market risk than others. For example one labeled as "aggressive growth" is very likely to loose 1/2 of its value during a bear market. One labeled as "short term government bonds" is likely to loose very little if any of its value during a bear market. In fact it is likely to increase in value.

Depending on your time horizon and the particular mutual fund that you pick, it may be very risky placing a large amount of money into one particular mutual fund. Most equity mutual funds tend to have an average annual return of about 8% to 12% annually over a long period of time--10 years and more. But during shorter investment periods these returns tend to vary greatly from -50% to +50% and more. There are actually some mutual funds, not many but some, that the annual return since 2000 has been negative. Those who had invested in these funds are not very happy today.

A wiser strategy than investing a huge sum into one particular mutual fund is to break that huge sum into portions. Place one portion into a money market fund, one portion into a capital appreciation fund, one portion into a fund that invests in international companies, one portion into an equity income fund, and maybe one portion into a short term bond fund. There are actually particular funds that do that called asset allocation funds, but it is not real smart to put all of ones money into just one fund. There is also the possibility that one particular fund might have bad management. It is a good idea to insulate yourself from that possibility as much as possible and that is best accomplished by spreading your investments around.

You're always subject to systematic risk, that affects the overall market, from interest rate changes to world events. You cannot escape systematic risk completely. The only thing you can do is hedge against it by being a longterm investor and gradually adjusting your portfolio to more fixed income investments as your time horizon becomes shorter.

Hi Goldie,

I am going to assume that you are asking about mutual fund investing. You seem to be combining mutual fund investing with investment banking in your statements and questions. The risks to investing in mutual funds are very similar to the risks of investing in individual stocks and bonds. After all, a mutual fund is primarily a portfolio comprised of individual stocks and bonds.

The risks vary greatly from asset class (stocks, bonds and cash) to asset class and from strategy to strategy (large-cap value, small-cap growth and emerging markets) Equities mutual funds generally have substantially more risk than fixed income mutual funds.

It is also important to consider your own risk tolerance. High-risk/high return mutual funds may be appropriate for an aggressive investor but may not be appropriate for everyone. For example, a small cap growth fund may be the best in its investment category but may not be appropriate for a conservative investor. Similarly, an intermediate bond fund may be the best in its category, but may not be appropriate for an aggressive investor. Unfortunately, far too many people cannot accurately assess their own risk tolerance. Many people have the tendency to overestimate their willingness to assume risk, especially during periods when stocks are performing well. A perfect example of this overestimation occurred in the late 1990s when technology stocks soared and investors increased allocations to this part of the market. The best time to assess risk tolerance is when markets are falling and investors are more in touch with the reality of losing money.

I hope this helps.


Michael A. Weiss, CFA
The Editor
The Mutual Fund Investor
http://www.mutualfundinvestor.net