Financial advisors educate their clients about risks associated with market volatility, interest rate and credit risk etc. But they should also keep in mind that although mutual funds are a popular investment choice, there are certain risks connected to them. As an advisor, you must alert clients about these risks.
The first risk related to mutual funds is liquidity. One of the main advantages of mutual funds is quick liquidity. However, there can be certain situations where your clients might not be able to sell their investments. For example, investors might find it tough to cash in their investment in closed end schemes . Financial experts must explain such risk to clients and advise them to keep liquidity in mind.
Net Asset Value (NAV) is the second important risk. Mutual funds are valued daily for calculating NAV. In addition, there is a constant inflow and outflow of funds by investors. In case the mutual fund scheme has a large redemption, it can use up the funds’ corpus in the short term and lower the NAV. To reduce this risk, advisors can tell clients to invest in funds with substantial AUM since they are likely to have adequate cash reserves to handle immediate liquidity needs.
Concentrated portfolio is the third risk associated with mutual funds. Every financial advisor is aware about the significance of diversification. Nonetheless, clients might have multiple schemes belonging to the same category. This can result in concentration and affect overall earnings. You must be careful about this risk and suggest the correct mix of diversified mutual funds to your clients.
The fourth risk is investing in mutual funds in another country. When financial experts propose international funds to their clients, they must first assess the business, fiscal and political dangers experienced by that nation as any instability in that country can directly have an unfavourable impact on investments.