Interest Rate Risk

This term describes the possibility that the investment value will decrease when interest rates increase. This factor leads to the possibility of losing money in any fund. The costs of investments have a close relationship with interest rates. Duration is a gauge of the sensitivity of an investment’s cost to the movements of this risk. A mutual fund’s duration relies considerably on the outstanding maturity of the investment.

Credit Risk

This describes an issuer’s creditworthiness and its anticipated capacity to make timely payments. If an issuer cannot repay interest or principal on time, a default occurs. A decline in the credit rating of an issuer causes the decline of the mutual fund costs. This may also cause the decline of the share costs of a fund. This factor mostly affects bonds than other mutual fund types.

Prepayment Risk

This is the likelihood that a mutual fund owner will obtain his or her investment from the issuer before the maturity date. This can occur when interest rates decline and current funds generate yields that surpass the market rates. Borrowers will frequently issue investments or acquire loans at the new low interest rates and use the returns to prepay debt with high interest rates. Prepayment also compels investors to reinvest their money in markets where existing interest rates are low, than those the prepaid fund pays. This factor is prevalent in investments with mortgage-backed securities.

Inflation Risk

This term describes the possibility that an increase in cost levels will destabilize the buying power of a fund’s fixed interest disbursements. Investors frequently find bond mutual investments appealing due to their regular payments from interest earnings. Nevertheless, these disbursements are vulnerable to the risk of inflation. Inflation influences any investment’s buying power. It is especially worrisome for funds that pay out a fixed interest stream over a period for instance bonds.

Call Risk

With these investments, the possibility of the issuer recalling the fund or bond before the maturity date exists. This implies that the investment holder will obtain payment on the bond’s value. The holder will then reinvest in an environment that is less favorable. As a result, the holder will forego the high investment rate and will consequently invest in a low-rate environment. This typically occurs because of declining interest rates.