Understanding the Risks in Mutual Funds
“Mutual fund investments are subjected to market risks” is the statement that we constantly see or hear. Like any other investments, mutual funds investments are subjected to risk. Gauging and understanding the risk is very important thing an investor should know.
How to understand the risk in Mutual funds ?
SEBI (Securities Exchange Board of India ) has mandated that all Mutual funds label its products with a riskometer that enables investor to assess the risk involved.
A riskometer looks like a speedometer and has 5 classifications such as Low, Moderately Low, Moderate, Moderately High and High.
Low indicates a low risk to the principal. Liquid , Money Market , Gilt funds are some of the fund that comes under this category.
Moderately low indicates moderately low risk to the principal and are suited to investors who can stay invested for 1 to 3 years. Short to Medium term funds, Capital protection oriented schemes fall under this category.
Moderate indicates the principal is at moderate risk. Arbitrage funds, Monthly Income Plan funds are the some of the funds that fits in this category. If you are an investor who is looking to make a decent return with a lean risk, you should opt for the funds with this label.
Moderately High Risk indicates a moderately high risk to your principal. Index Funds, Balanced funds and equity oriented funds come under this category. The funds with this label are best suited for investors who seek to create wealth and stay invested for a long term.
High Risk indicates a high level of risk for your principal. Sector funds and Thematic funds are some of the funds categorized as high risk. This is suitable for aggressive investors who are willing to take significant risk.
While riskometer is one of the tools to gauge the risk of mutual funds, investors should also take in to account other factors such as their risk appetite, age, goal, period for which they can stay invested to choose the right fund for investment.