For instance, stocks require much risk as compared to bonds so an equity fund proves to be much riskier than bonds. Depending on the investment objective and category, a mutual fund can be subject to any or all of the following risks which could affect a fund’s performance.
1. Market Risk
The prices of and the income generated by the securities held by mutual funds may decline in response to certain events, including those directly involving the companies whose securities are owned by the funds, general economic and market conditions, regional or global economic instability, or currency and interest rate fluctuations.
2. Credit Risk
The risk that a security's issuer or the counter party is unable to meet its obligation in full and/or on time such as payment of interest or repayment of capital or any other financial or legal obligation.
3. Interest Rate Risk
The risk that an investment's value will change due to a change in the absolute level of interest rates. Normally, rise in interest rates during the investment period may result in reduced prices of the held securities.
4. Liquidity Risk
The risk stemming from the lack of marketability of an investment that cannot be quickly bought or sold to convert in cash without loss. Certain securities may be difficult or impossible to sell at the time and price that the mutual fund needs. The mutual fund may therefore be forced to sell a security at a lower price, sell other securities in its portfolio or forego an investment opportunity due to liquidity constraints. This could have a negative effect on the Fund's performance.