All investments offer a certain level of risk. Losing some or all of your money, regardless of the type of investment, is a very real possibility. Investors have a variety of investment objectives, and many times these objectives are affected by the current market conditions. Mutual fund investments are linked in part to interest rates, and working with risk mutual funds will be challenging to any investor.
Reading the risk mutual funds prospectus will help investors to understand the risks assigned to a particular risk mutual funds. There are a variety of risks defined with risk mutual funds, and they all have their own set of risks.
Call Risk regarding risk mutual funds means interest rates will cause a bond issuer to redeem its high-yielding bond before the bond matures. Country Risk relates to the possibility that some political event or natural disaster will weaken a country’s economy. Credit Risk is when a bond issuer fails to repay interest and principal on time. Currency Risk is when your financial returns could be affected by foreign securities changes due to a rise in the value of the U.S. dollar against a foreign currency, which is when a fixed-income fund's dividends will be affected by lower interest rates. Industry Risk relates to the possibility that a group of stocks in a single industry will decline in price due to negative developments in that specific industry. Inflation Risk is something every investor fears, where increases in the cost of living will reduce a fund's value, based on its inflation-adjusted returns. Interest Rate risk as it relates to risk mutual funds is a real possibility in today’s market, when a bond fund will decline in value because of an increase in interest rates.
A human element based risk is that of a Manager risk. This happens when an actively managed mutual fund's investment adviser fails to act based on a fund's investment strategy, thereby resulting in his failure in reacting market conditions and executing to the benefit of the risk mutual funds . Market risk results when a stock or bond fund price declines over a short or long period of time. As with all risk mutual funds, the stock and bond markets move in cycles, when prices can rise and fall in volatile cycles.
In reality, risk mutual funds, like many investment, run through cyclical stages. Doing your home work, doing your research, and reading the prospectus will help you to better understand if the investment in risk mutual funds is right for you.