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Unlabelled What is Market Risk in Mutual Fund | Limitations of Mutual Fund | Hidden Problems of Mutual Fund

What is Market Risk in Mutual Fund | Limitations of Mutual Fund | Hidden Problems of Mutual Fund

Mutual Funds:

  •  MF are subject to market risk. Please read the offer document carefully before investing.

Limitations of MF

1. Cash Position Of Mutual Fund

- Fund manager decides this.

- how much cash position will be maintained in that particular MF? & how much will be invested in market? is mentioned in offer document. Read it.

Why cash position is maintained ?

- Few investors who put their money in MF might need it back after few years. So they would like to take back their invested money.

- For few investors for redemptions.

- Only 2-5% cash for redemptions allowed. The rest 95% of the money remain invested in the market of the investor.

- Upto 10% for buying opportunity. (In case stock market is going down, fund manager decide to inc. cash position and not to invest in market)

Exceptions of Cash Position

- In general Equity Fund : 5-10%

- In liquid fund : 20% cash is kept. & Rest is being invested becuz it is meant for short term investment.

Pros

If market grows up, and all money is invested, mf get great returns.

Cons

If market grows down, Buying opportunity finishes.

General Idea:

We invest our money on MF - when market is high - - more people invest their money -MF gets more money - - MF puts all it's money on stock market - - market is already high - - MF purchase stocks at high price by design as market is up.

If economy goes down - - more people will take out their money from MF - - so MF has to take out money from stock market - - so MF has to sell low.

(MF : market up->buy high, market down->sell low)

= MF always has to keep money invested, this is its mandate.We as a retailer has the opportunity to hold the cash, this is an advantage.

2. Problem of Big Money.

MF has so much money to invest. In fact, when funds get huge, MF get close.

**MF don't want majority stakes in a company. (Eg: When a company of valuation 200cr, MF invested 100 cr in it, becomes majority stake holder.)

**Huge MFs when invest in small companies (let say, 1000 crore MF invested 10 crore in small company of total valuation 200cr; a small company of a small base has a huge potential to grow). Even though the company grows, brings huge return. The effect of total return for a huge MF of 1000cr will be just minuscule, eg: 0.2% return. 

**So, large MF invest in profitable small company doesn't bring much return. Big returns in small companies will hardly affect overall returns of mutual funds by design.

**Whereas individuals or retail investors doesn't have this limitation. We can analyse stocks, understand market on its own.