Then why does the disclaimer say Mutual Funds are subject to market risk?

Mutual Funds invest in securities and the nature of securities depends on the scheme’s objective.

For instance, an equity or growth fund would invest in company shares. A liquid fund would invest in Certificates of Deposit and Commercial Paper.

All of these securities are however traded in the ‘Market’. Company shares are bought and sold through the stock exchange, which is part of the Capital Market. Similarly, debt instruments like Government Securities, can be traded through a platform at the Stock Exchange or through specialised systems called NDS. These serve as markets to buy and sell securities and the buyers and sellers are diverse. So, the entire process of buying and selling, and price determination is done by the ‘market’.

The price of any security is dependent on ‘market forces’, and the market acts on any news or development, making it difficult to predict the direction of the market, it's impossible to predict the price of a share or security in the short term. There are too many factors and players that influence its direction.

Thus, every investor should know that there always exists a certain risk to security price from an all-important entity known as the ‘Market’. They should also know that Mutual Funds are designed to reduce this risk as much as possible.