Mutual funds invest in different securities which may be equities or bonds, depending upon the fund’s objectives. Accordingly, different schemes have different risks depending on the portfolio composition. In general, mutual funds are subject to the following risks –

Systemic risks

Systemic risks or market risks refer to risks that affect the entire market and have an impact on the entire class of assets. The value of an investment may decline over a period of time because of economic changes or other events that affect the overall market. Systemic risks include risks related to interest rates, inflation, exchange rates and political events, etc.

Non-systemic risks

Non-systemic risks refer to risks associated with investments in a particular sector or industry or stock. Sector-specific schemes invest in equities of a particular industry or sector, owing to which they are subject to higher risks than other diversified schemes. For example, tax benefits to a particular sector of the economy would affect the shares of companies belonging to that sector and thus, affect the returns of funds investing in that sector.

Other factors that have a greater impact on the performance of a mutual fund include the skill and experience of the fund manager and the research team, the size of the corpus, redemption pressures, etc.