Why mutual funds are subject to market risk?

Mutual funds are subject to market risk because they invest in stocks, bonds, and other securities that are traded on stock markets, bond markets, and other financial markets. These markets are subject to various types of risks, such as economic, political, and global events that can affect the prices of the securities that the mutual fund holds in its portfolio.

For example, if the stock market experiences a downturn, the value of the securities held by the mutual fund can decline, leading to a decline in the net asset value (NAV) of the mutual fund. Similarly, if interest rates rise, the value of the bonds held by the mutual fund can decline, leading to a decline in the NAV of the mutual fund.

In addition to market risks, mutual funds are also subject to other types of risks, such as credit risk, liquidity risk, and operational risk. Credit risk is the risk that a bond issuer will default on its payments, while liquidity risk is the risk that a security cannot be sold quickly enough to meet the needs of the mutual fund’s investors. Operational risk is the risk that the mutual fund’s operations will be disrupted due to factors such as system failures, fraud, or human error.

Overall, mutual funds provide investors with a convenient and diversified way to invest in a range of securities, but they also carry risks. As with any investment, it is important to carefully consider the risks and potential rewards of investing in a mutual fund, and to consult with a financial advisor to determine whether a particular mutual fund is suitable for your investment goals and risk tolerance.

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