The Least Understood line about Mutual Funds

Amar Pandit , CFA , CFP

We see a lot of Mutual Funds Sahi Hai advertisements during the IPL matches. My daughter Reet remarked “While the advertisements are focused on Mutual Funds Sahi Hai, do people know Mutual Funds Kya Hai?” I thought it was an insightful observation so thought of writing about a finer point that is often misunderstood.

We have heard (and read) this line “Mutual Funds are subject to Market Risk” so many times that the only thing people will likely remember about mutual funds is this line. However very few people will understand what this line actually means.

The line does not mean that you will lose money when you invest in a mutual fund. The line means that the value of your investment will go up and down (it will be volatile). We are used to things going in a linear fashion like a loan given to a bank (also known as Fixed Deposit). However, this is not how it works in a Mutual Fund. The value fluctuates daily.

Market Risk does not mean the value of the market goes down to zero. It only means that the value goes up and down.