Apr 27, 2019 5 min read

How to Choose the Best Mutual Funds Based on Your Risk Capacity?

Know how to choose a mutual fund scheme based on your risk capacity

Let it be life or investments, for a smooth journey risk needs to be calculated. Without considering the risk you can not prepare proper strategies to reach your goals. The same is true for mutual fund investments, as your risk taking capacity plays an important role in the selection of mutual funds.

So, today continuing with our MF learning series we bring you the way of selecting mutual funds as per your risk capacity. For the users who have not yet read our previous article on how to asses the risk capacity can check the same here: How to Analyze Risk for Mutual Funds Investments?. So, let’s take a look.

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Different Risk Capacity Among Investors

While investing in mutual funds, investors have different types of risk capacity. So, before we discuss the mutual fund selection as per the risk, let’s take a look at the different types of risk:

  • Very High Risk Investors- These investors don’t get easily panicked by the volatility in the returns and can handle the volatility of more than 30% for a period of 3-5 years.
  • High Risk Investors- These investors also have a good financial backup, can handle volatility, and can tolerate 20%-30% fall in returns for up to 3 years.
  • Moderate Risk Investors- As the name suggests, these type of investors can handle mediocre risk and can handle a downfall of 10%-20% fall in returns for a period of 1 to 2 years.
  • Low Risk Investors- Investors with low risk usually have a small financial backup, thus can handle a small risk with their investments and can tolerate a downfall of 5%-10% for a period of 4 months to 1 year.
  • Very Low Risk Investors- These are the investors with a small or no financial backup, so cannot handle any kind of risk and have the tolerance to a downfall of up to 5% for a period of 3 months.

So, these are the different types of investors based on the risk taking capacity. Now, in the previous article The Two Best Styles of Investing in Mutual Funds, we have discussed the two major style of investing followed by investors that are fund based investing and portfolio based investing. Following are the schemes’ selection criteria for both types of risk appetite.

Selecting Schemes in Fund Based Investing

Mutual fund industry has investors with different risk appetites. So, before we discuss the mutual fund selection as per the risk, let’s take a look at the different types of risk:

First of all let’s take a look at the fund based investing, which is a way of investing in mutual fund where the focus is on the portfolio of a particular scheme. So, as there are different categories in mutual funds, each one is suitable for investors with different risk appetites.

  • Very High Risk: investors have the ability to handle high volatility so all the categories are suitable for them. But, the small cap, mid cap, and sector funds are the suggested categories as huge rewards can be gathered for the risk taken.
  • High Risk: investors also have a good tolerance for volatility, so except for small caps, they can also invest in any category scheme, but the suggested ones are mid caps, and large & midcaps as due to high exposure in mid caps, good returns can be accumulated.
  • Moderate Risk: investors can tolerate a medium level of fluctuations so are suggested to invest in large caps and multi cap funds, as these provide optimal growth with a moderate level of fluctuations. In addition to these, aggressive hybrid funds are also an option that can be explored by investors with moderate risk.
  • Low Risk: investors can opt hybrid category mutual funds or the long duration funds of the debt category as the growth is good and the risk associated is low.
  • Very Low Risk: investors are suggested to invest in only the debt schemes, and the suggested categories are low duration funds and medium duration funds.

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Selecting Schemes in Portfolio Based Investing

Portfolio based investing is the one in which the investor creates a portfolio by adding mutual fund schemes from different categories. The selection of schemes is dependent on the future goals of the investors.

  • Very High Risk: investors are suggested to invest in an aggressive portfolio as their goal is to maximize the returns in the long term.
  • High Risk: investors can choose the moderately aggressive risk, as these are best for accumulating a good corpus in the long term.
  • Moderate Risk: investors are suggested to invest in a balanced portfolio, and depending on their preferences the investments in the equities and debt category funds can be altered.
  • Low Risk: investors can choose a conservative portfolio to reach their investment goals, in which the portion of debt schemes is really high.
  • Very Low Risk: investors are suited to a highly conservative portfolio, as the fluctuations in returns are extremely low or nil.

So, this is the criteria of selecting mutual funds for investors with different risk capacity. Now, you can refer to our previous blogs for information regarding the funds and portfolios. And, if you want to know about the fund selection process for your portfolio, stay tuned with us. In case you have any query, feel free to connect with the experts @ 9660032889.

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