Equity Mutual Funds - what constitutes the risk

There are a lot of investment options that are available in the market today. One of these options is investing in Mutual Funds. Mutual Fund are basically investment options that serve as market linked investment products and come with a lock in period of 3 years and offer various fund instruments for investment purposes. The tax benefit of mutual funds is exclusive for some fund instruments and not generally for all the instruments. There are exclusive tax-efficient mutual funds that are actually ELSS (Equity Linked Saving Schemes). These are the funds that offer tax deductions on investment and unlike other types of mutual funds, have some degree of tax-effectiveness. Generally, when you invest in mutual funds, your mutual fund advisor or manager decides the allotment of fund values in different fund options. These options may be chosen from a host of available ones and may be equity-based, debt-based or a mix of debt and equity-based options.

Equity-based mutual funds invest in equity or a specific part of the ownership shares of a company. Such mutual funds are of various types depending on the stock-evaluation of a company, fixed sectors and the type or mode of investment pattern being followed. Equity-based mutual funds may be large-cap, mid-cap or small-cap. Large-cap stocks are maintained by topmost corporate companies who have a credible and publicly-known brand value and therefore, form a low-risk investment medium. Mid-cap stocks are those that are maintained by mid-level companies that are not as large in operations, staffing, revenue etc. as large-cap ones but are not as low as small-cap companies. The risk factor of investing in such stocks is low-to-medium. Lastly, there are small-cap stocks that are maintained by small or newly formed companies. Though the risk involved in such investments is huge, yet there are chances of higher returns than mid-cap or large-cap options.

The risk factor in equity-based mutual funds is constituted by a range of parameters that depend on the market-risks or overall fluctuation, depreciation in the rate of interest offered on the returns or the risks associated with a one-sided investment portfolio. There may be a situation, especially so with small-cap stocks, where the issuing company may go bankrupt within a short period of time. In such a case, the loss of investment is total and all the invested funds vanish. On the other hand, there may be a situation where the stock-value of the issuing company may shoot up favorably in a short period of time and therefore, the returns gained by the investor become immense. In simple terms, the various risks associated with equity-based mutual funds must be kept in mind while investing and any decision to invest in any such fund option must be taken after due thought and due evaluation.

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