Mutual fund (MF) advertising indicates that “mutual funds are subject to market risk. Please read the offering document carefully before making any investment.” This exclusion of liability serves solely to fulfill the legal requirements. Few would have heard it mentioned on the radio or television as it flashes by in a flash. In print media (newspapers, magazines) it is published in extremely small type. Only investors familiar with the legal requirements would even know the statement, as advertising with “naming” disclaimers is hardly revealing.
So what’s the secret behind the “Flash” statement? The statement means that the mutual fund invests the money raised from investors in instruments that are subject to market risk. Every investor in an MF should read the offer document carefully before investing his money with the fund house.
As an investor, you should be aware of two concepts – market risk and offering document.
market risk –
What do you mean by market risk? It is the risk that can reduce the value of the investment due to market conditions. The different types of market risk are as follows: equity risk, interest rate risk, currency risk, commodity risk.
• Equity Risk – This type of risk arises due to changes in the stock prices in which the mutual fund invests.
• Interest Rate Risk – This type of risk arises from changes in interest rates.
• Currency Risk – This type of risk arises from changes in exchange rates.
• Commodity Risk – This type of risk arises from changes in commodity prices.
offer document –
It is a document published by the mutual fund house which contains very useful information about the MF program (risk factors, initial issuance costs, sponsor’s track record, qualifications and experience of the fund manager, previous performance of other MF programs set up by the mutual fund, pending litigation and penalties imposed, etc.)
The message behind the disclaimer is clear: it states that investments made by mutual funds on our behalf are not entirely risk-free. It is susceptible to all the risks that every other investment faces. The message from the mutual fund house is very simple, but as investors we tend to ignore it and invest in mutual funds without reading them. So before you next think about investing, remember to read the offering document and understand the risk.