Are mutual funds safe? The risks that come with them

Your money is protected from misuse by how mutual funds are set up, but its value is not protected. A mutual fund can lose value, and how much it can lose depends on what it invests in. Some funds barely move. Others can fall by a third in weeks.

Are mutual funds safe?

Safe from misuse, yes. Safe from loss, no.

Safe from misuse. A mutual fund is a trust registered with SEBI. A fund house manages the money. A trustee company holds it on your behalf and watches the fund house. A separate custodian, also registered with SEBI, keeps the shares and bonds. Each unit you own is a slice of everything the fund holds, so its value moves with those holdings. The full picture, including what happens if a fund house or an app shuts down, is in can a mutual fund investment drop to zero.

Safe from loss. Every mutual fund advert must carry the line "Mutual Fund investments are subject to market risks, read all scheme related documents carefully." SEBI's Investor Charter tells investors not to fall for the promise of indicative, exorbitant or assured returns. And units are not deposits, so the deposit insurance that covers a bank account, up to ₹5,00,000 per depositor per bank, does not cover them.

That is why "mutual funds" is the wrong unit to ask about. Risk belongs to the fund's category, and the riskometer table below shows how widely it varies.

Is any mutual fund risk-free?

No. Even the lowest level on SEBI's riskometer is a level, not zero.

SEBI makes every fund carry a risk label, the riskometer. It has six levels, from Low to Very High, and is checked every month. Under the dial, every fund must say in words: "The risk of the scheme is" followed by its level. There is no "no risk" level, so Low still means some risk.

The same warnings run through every fund's documents. A fund's value can go up or down. There is no assurance it will meet its objective. Past results do not promise future ones. A fund's name says nothing about its quality. And you can lose money, including what you put in.

On 29 September 2026, most listed overnight funds read Low and most listed liquid funds read Low to Moderate. Neither is risk-free: bonds can be downgraded and interest rates move. See overnight funds and liquid funds vs fixed deposits.

What risks do equity funds carry?

Equity funds carry the risk of losing money, and AMFI says so first. Equity means shares of companies, and an equity scheme is one that mainly invests in them.

AMFI's wording is that investors should not put money into equity schemes unless they can afford to lose what they put in. It also says equity shares are prone to price fluctuations on a daily basis, which it calls price risk.

Market risk

Market risk is the plain one: share prices fall, and the fund's NAV falls with them. NAV is the price of one unit of the fund.

Take one dated example. The NIFTY Midcap 150 is an index, a list of 150 mid-sized companies picked by fixed rules, whose combined value is tracked daily. Its price index closed at 6,792.20 on 7 February 2020, the highest close of that year before the fall. On 23 March 2020 it closed at 4,165.90. That is a fall of 38.7% in about six weeks.

On that move, ₹50,000 would have become about ₹30,667. This is a past price index with no dividends, costs or tax. It is not a fund, and it is not a forecast.

Inflation is a quieter risk: rising prices mean the same rupee buys less over time.

Concentration

Concentration risk means too much of a fund rides on too few holdings. A close cousin is what AMFI calls event risk: price risk due to a company or sector specific event.

SEBI caps how much of a fund can go into one company: 10% of the fund's value, for most equity funds. Index funds, ETFs and sector or theme funds are exempt from that cap. A sectoral fund must hold at least 80% in one sector, and a thematic fund at least 80% in one theme. A focused fund holds at most 30 stocks. See sectoral and thematic funds.

Liquidity in mid and small caps

Market capitalisation is a company's size, its share price times the number of shares. AMFI ranks listed companies by it, and ranks 101 to 250 are mid caps. A mid cap fund must hold at least 65% of its money in them.

Liquidity risk is the chance that a fund cannot sell a holding quickly at a fair price. AMFI warns that trading volumes and settlement periods may limit how easily a fund can sell. Being unable to sell could mean losses for the scheme. Every month, AMFI publishes how many days a mid cap or small cap fund would need to sell 50% and 25% of its portfolio. Start with mid cap funds.

Currency and overseas limits

A fund that invests overseas must disclose its currency risk and the risk of the overseas investment limit running out. When the industry limit is used up, a fund may be unable to invest more overseas, and some funds have paused fresh investments. See international funds.

What risks do debt funds carry?

Debt funds are not risk-free either. Debt means loans to governments, banks or companies, in the form of bonds, and a debt scheme mainly invests in those.

Interest-rate risk

Interest-rate risk is the chance that a change in rates changes the value of a fund's bonds. SEBI's investor website sums it up: when interest rates rise, bond prices may fall, and vice versa.

AMFI adds that the extent of the fall or rise depends on the coupon (the interest a bond pays) and maturity of each bond. The detail is in how interest rates affect mutual funds.

Credit risk

Credit risk is the chance that a borrower pays late or does not pay back. A credit rating is the rating agency's opinion on how likely a borrower is to repay a debt in full and on time. Ratings can change quickly.

AAA means the highest degree of safety and the lowest credit risk. AA means a high degree of safety and very low credit risk. A means an adequate degree of safety and low credit risk.

Credit risk differs by fund. A corporate bond fund must hold at least 80% in bonds rated AA+ and above. A credit risk fund must hold at least 65% in bonds rated AA and below, not counting AA+. See corporate bond funds and credit risk funds.

Government securities are different. The RBI says government securities carry practically no risk of default. Their prices still move with interest rates.

If a bond is downgraded below investment grade or defaults, the fund house may, with the trustees' approval, split it off into a segregated portfolio.

Liquidity risk

Most open-ended debt schemes, the ones that stay open for buying and selling at NAV, must hold at least 10% of their net assets in liquid assets, and liquid funds at least 20%. Every open-ended debt scheme except overnight funds is stress-tested at least monthly for interest-rate, credit and liquidity risk.

AMFI also names re-investment risk: interest rates when a bond pays interest or matures may differ from the bond's original rate. For a regular monthly investment, see SIPs in a debt fund.

Which is riskier: equity, debt or hybrid funds?

Equity funds sit at the top of the riskometer, and debt funds start from Low. Hybrid funds hold a mix of the two by rule, so where they read depends on the mix. SEBI's ranges are:

• Conservative hybrid: 10% to 25% in equity and 75% to 90% in debt.
• Balanced hybrid: 40% to 60% in each.
• Aggressive hybrid: 65% to 80% in equity and 20% to 35% in debt.

The riskometer scores the portfolio itself. For a fully invested equity portfolio, the level is High at best and usually Very High.

What the riskometer read on 29 September 2026 (listed funds on Koshex)

Two more readings from the same day: most listed arbitrage funds read Low, and most gold funds read High.

The horizons are Koshex's own suggestions, not SEBI rules; the full list is on the category hub. More in equity funds, debt funds and hybrid funds.

What does the riskometer tell you, and what doesn't it?

It tells you the level of risk in a fund's portfolio today, and it does not tell you how much you might lose or when.

Each fund's level is assigned when it launches and evaluated again every month. You will find it on the front page of the application form, the scheme information document and the key information memorandum. It also appears wherever the fund's returns are shown, with the benchmark's dial beside it. A benchmark is the index a fund's performance is compared with. Each fund also has a product label starting "This product is suitable for investors who are seeking", which names a short, medium or long term horizon.

What the dial does not do:

• It is not a forecast. A Very High reading says the portfolio sits at the top of SEBI's scale. It does not say a loss is coming.
• It does not say how large a fall can be or how long it lasts.
• It can change. A change in level is communicated to that fund's unitholders.

For the numbers behind risk, read 5 ways to measure mutual fund risk. For what to do about it, read top strategies to reduce mutual fund risk.

Koshex reviews your holdings over time and flags changes, such as a fund's category, risk or ranking shifting. To see how the riskometer helps you rule categories out, use the category hub.