Mutual Fund is one of the most popular investment options. It is a professionally managed investment fund that pools money from many investors in the market to purchase securities. These investors may be retail or institutional in nature. All mutual funds are registered with SEBI (Securities Exchange Board of India). Considering the returns in recent times, investing in mutual funds has become one of the easiest means to grow wealth. However, the fund manager’s expertise (thereby the fund house’s reputation) is an important factor to consider for all aspiring investors. 

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Mutual Fund is highly risky as it is formed when capital is collected from different investors and invested in different shares, stocks or bonds etc. which is shared by thousands of investors and managed collectively by a fund manager to earn the highest possible returns.

Hemant Rustagi, CEO, Wiseinvest Advisors told Zee Business TV about how an investor can remain risk-free while investing in Mutual Funds.

Here are the 6 types of risks involved in equity investments:

1. Market risk: Equity markets are highly volatile and therefore a portfolio of an investor is likely to impact due to up and down movements. In the case of debt-funds, the interest rate keeps on changing, which impacts the overall return.

"The investor should diversify his\her portfolio to parallel the different risks involved in various kinds of funds. They should re-balance the portfolio from time to time to bring down the market risk," Rustagi said.

2. Longevity risk: An investment is made for a better retirement. A keen investor wants his\her money to grow on a long term basis but investing for retirements involves risk of age and other issues. 

"An investor should start investing as early as possible to retire with financial freedom. One should include various options to the corpus like hybrid funds, equity funds, debt funds and the income strategy should be tax friendly in a longer term," Rustagi said.

3. Inflation risk: Markets are inflation driven. Various businesses depend on prices of commodities and services. Therefore it is the most essential risk to be eliminated in a long term and it is important to invest money into options which can beat inflation rates in a long term.

"For instance, a person falls under the highest tax slab and gets an 8 per cent interest on a fixed deposit. Post-tax, the remaining interest income will only be 5.6 per cent. But as inflation rate sustains at a 7 per cent rate, the money is only growing in numbers not in real," Rustagi explained.  

4. Liquidity risk: Uncertainty can occur anytime, anywhere. An investor would want to encash his/her investment into during an emergency. Therefore, an investor should invest in funds with no or less locking periods unlike the fixed deposits. 

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5. Situational risk: These risks often happen due to different situations and events. As funds are market driven, the markets are impacted on various events. Therefore an investor should not take any decision in a hurry. He or she should think wisely and trust his\her decisions. 

6. Sequential risk: Even if the investments are done wisely, the markets tend to give losses due to risk and volatility involved. Therefore an investor should invest wisely in different sectors, with medium-term goals and diversified options.

"The stock market can be down during your fund's maturity, so there is no guaranteed return here. But a target of 12-14 months and a wise investment on different option generally gives over 15 per cent of return annually," Rustagi said.