Equity Mutual Funds - what constitutes the risk

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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