Short answer: Mutual fund risks come mainly from the prices of the assets the fund holds. Each unit’s price, called the NAV (net asset value, the value of one unit), rises and falls with those prices, and a fall in NAV is the main way investors lose money. The size and type of risk depends on what the fund invests in, whether that is shares, bonds, foreign securities or a small number of holdings.
Last reviewed: 10 November 2026
At a glance
| Risk | What causes it |
|---|---|
| Volatility risk | Share prices move with company performance, government directives, SEBI and RBI policies, and the economic cycle |
| Liquidity risk | A lock-in period, such as ELSS, or too few buyers, makes it hard to redeem units without a loss |
| Interest rate risk | When interest rates rise, bond and debt instrument prices fall |
| Credit risk | A bond issuer fails to pay the promised interest, more likely with lower-rated securities |
| Concentration risk | Money is placed in a single scheme, company or sector that performs poorly |
| Currency risk | The foreign currency weakens against the rupee, reducing the rupee value of returns |
Where does a mutual fund’s risk come from?
A mutual fund pools money from many investors and places it across asset classes such as equities (shares of companies), bonds and other securities. Because the fund’s value depends on those holdings, it cannot be more stable than what it owns. A fund that holds shares will swing more than one that holds only government bonds, and both can lose value.
Mutual funds are not bank deposits, so the NAV is not guaranteed. The NAV is recalculated as the market prices of the holdings change. You take on the gains and the losses of those prices.
How does a fall in NAV turn into a loss?
A loss becomes real when you redeem, meaning sell your units back to the fund, at a NAV lower than the one you paid. Until then, the drop is a fall in the value of your units on paper. The fund’s holdings may recover, but there is no guarantee they will.
Why do equity funds move up and down so much?
Equity funds hold shares, and share prices respond to company results, government directives, SEBI and RBI policies and the wider economic cycle. Any of these can push prices down quickly. This is volatility risk, and it is the reason equity funds show the largest swings in NAV among the common fund types.
What is liquidity risk?
Liquidity means how easily something can be turned into cash without a loss. Liquidity risk arises when a fund has a lock-in period, such as ELSS (Equity Linked Savings Scheme), during which you cannot redeem units. It also arises when there are too few buyers, which can make it hard to redeem units without accepting a lower price.
How do interest rates affect debt funds?
Debt funds hold bonds and other debt instruments, which pay a fixed interest rate. When interest rates rise, newly issued bonds pay more, so existing bonds with lower rates become less valuable. Their prices fall, and so does the value of the debt fund holding them. This is interest rate risk, and it applies even to debt funds that hold high-quality bonds.
What is credit risk in a debt fund?
Credit risk is the chance that a bond issuer fails to pay the promised interest. Holding lower-rated securities can raise returns, but it also raises this risk. A fund that reaches for higher yields is taking on more credit risk, not free extra return.
Why does holding one scheme or sector add risk?
Concentration risk arises when money is put into a single scheme, company or sector. If that holding performs poorly, the capital loss can be heavy because there is little else in the portfolio to offset it. A fund spread across many holdings usually has less of this risk than one focused on a narrow area, though it still carries the other risks listed above.
How can foreign holdings create currency risk?
Some funds hold foreign securities. When the foreign currency weakens against the rupee, the rupee value of those holdings and returns falls, even if the foreign prices have not changed. This is currency risk, and it adds a layer of movement on top of the fund’s underlying investments.
What does a loss look like in numbers?
The following is a hypothetical example, with invented figures for illustration only. An investor puts Rs 1,00,000 into an equity fund when the NAV is Rs 50, which buys 2,000 units. If the NAV falls to Rs 40, the units are worth 2,000 × Rs 40 = Rs 80,000. The paper loss is Rs 20,000, a fall of 20 per cent, and it becomes real only if the units are redeemed at that price.
Frequently asked questions
Can I lose money in a mutual fund?
Yes. Because a fund’s NAV moves with the prices of its holdings, a fall in NAV is the main way investors lose money. The loss becomes real when units are redeemed at a lower NAV than the one paid.
Are debt funds free of risk?
No. When interest rates rise, the prices of bonds and debt instruments fall, which lowers the value of debt funds. Holding lower-rated securities also adds credit risk, the chance that an issuer fails to pay the promised interest.
What does a lock-in period mean for risk?
A lock-in period, such as the one in ELSS, creates liquidity risk because you cannot redeem units during that time. Even without a lock-in, too few buyers can make it hard to redeem without a loss.
Does spreading money across many holdings remove all risk?
No. Spreading money reduces concentration risk, which arises when money sits in a single scheme, company or sector. Volatility, interest rate, credit and currency risks can still affect the fund.
Sources and last check
Facts in this article were checked against the sources below on 10 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- upstox.com (broker education)
- icicidirect.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.