The arguments about whether mutual fund investments carry 'risk' is raging ever since the industry body, Association of Mutual Funds in India (AMFI), has requested the market regulator Sebi to replace the term 'market risk' with 'market fluctuation' in disclaimers of mutual fund advertisements.
Managed portfolios, like mutual fund schemes, always carry several risks. For example, equity schemes have market risk (i.e. NAV of the scheme going up or down with the broader stock market) and fund manager risk (i.e. fund manager underperforming the benchmark). For debt funds, it is mostly default risk, interest rate risk and liquidity. Default by even one company can throw tantrums and we have seen that recently in Amtek Auto and the J PMorgan Mutual Fund case. Interest rate risks arise because the market price of debt securities move up and down based on interest rate fluctuations. Longdated gilt funds are the best example for this.
