Hi, in this video we will be talking about risk management through mutual funds.

Hi, in this video we will be talking about risk management through mutual funds. As we all know mutual funds invest in various types of securities most of them carry various inherent risks, these risks cannot be completely eradicated, but they can be managed through mutual funds.

Let us discuss some common types of risks and how mutual funds help us for their risk management:

• Volatility risk: This is the risk that comes from the possibility of an abrupt change in the value of a security. The market is a dynamic platform which is affected by various factors. Therefore, as investors we will always be exposed to such a risk, to lessen the effect of this risk we can invest in mutual funds specifically through sips. By regularly depositing a fixed amount towards a fund through sip you can average out the overall effect of any volatility in the market.

• Concentration risk: This risk arises from lack of diversification in our portfolio. It may happen that we could end up overexposing ourselves to a specific type of asset class, this can lead to an increased concentration risk which we can reduce through mutual funds. This is because mutual funds are already diversified investment systems. They are created with the purpose of reducing risks for their investors therefore if we invest in mutual funds, we can achieve a suitable level of diversification for our portfolio.

• Taxation risk: A tax efficient portfolio is a portfolio that can help us achieve the best returns. Therefore, as informed investors it is our responsibility to choose investments which post the least possible tax burden on our portfolio thankfully with mutual funds like the equity linked savings scheme or the ELSS. We can now achieve tax efficiency with long-term wealth creation. These schemes offer tax exemptions for the amount deposited and for any returns earned as well, also the three-year lock-in period given by these schemes helps investors build the habit of long-term investing too.

This is how mutual funds can help us deal with three major risks that we can be exposed to as investors.

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