Liquidity Risk — Mutual Fund Term Explained

The risk that a fund cannot sell its holdings quickly at fair value. Can cause redemption delays in small cap or low-rated bond positions.

Liquidity risk is the risk that a fund cannot sell securities quickly without significantly impacting the price. In small cap equity funds, large orders can move the market.

In extreme cases (like Franklin Templeton 2020), funds can be wound up and investors wait months for redemption proceeds.

Related terms

• Small Cap Fund — A fund investing at least 65% in companies ranked 251+ by market cap. Highest return potential but most extreme drawdowns. Requires 10+ year horizon.
• Credit Risk — The risk that a bond issuer defaults or is downgraded, causing the fund's NAV to fall sharply. Higher-yield bonds carry more credit risk.
• Redemption — Selling mutual fund units back to the fund house. Proceeds credited to your bank in T+1 to T+3 business days.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.