How to Choose the Right Mutual Fund for Your Risk Tolerance
by Admin
If you invest in mutual fund, then selection of right mutual fund is very important for getting proper output. Part of the consideration that one makes in arriving at this decision pertains to the individual’s tolerance to risk. This guide will take you through how to link your risk profile to the most suitable type of mutual fund.
For first timers to mutual funds navigation, or for those seeking to adjust on their current list of funds, visit our Screener and search for a list of mutual funds that interest you
Understanding Risk Tolerance
An investor's willingness to take risks shows how much change in investment returns they can handle. It depends on your financial ability to invest, what exactly you want to invest in, and how you feel about the volatility or otherwise of the market.
Types of Risk Tolerance
| Risk Tolerance | Basic Characteristics | Suggested Fund Types |
|---|---|---|
| Low | Prefers safety and stable returns, may have short-term goals or low-risk capacity. | Debt Funds, Liquid Funds, Short-term Bond Funds |
| Moderate | Willing to take some risk for higher returns, balanced approach. | Balanced Funds, Hybrid Funds, Large-Cap Equity Funds |
| High | Comfortable with market volatility, aims for long-term capital appreciation. | Equity Funds, Sectoral Funds, Small & Mid-Cap Funds |
Choosing the Right Fund
1. Low Risk Tolerance
You want to have as much money as possible at the end of every week or month, plus interest, with a low risk-tolerance, you fancy more capital preservation. You might want to consider investing in:You might want to consider investing in:
- Debt Funds: These funds involved buying of bonds and are suitable for low risk taker investors.
- Liquid Funds: Being appropriate for parking excess funds, they bring better yields than most savings accounts with a relatively small level of risk.
2. Moderate Risk Tolerance
For moderate risks takers, there is a moderate risk tolerance, and thus the need to balance on the safety and the growth aspects. Consider:
- Balanced Funds: They have incorporated equities as well as bond securities as their investment assets delivering reasonable volatility benefits.
- Large-Cap Equity Funds: These funds are known to invest in big, stable organisation, meaning that they have low risk as compared to the mid or small capitalisation funds.
3. High Risk Tolerance
If your tolerance to high risks is good then you can opt for highly risky funds in order to gain big. Consider:
- Equity Funds: Most of these funds major on stocks and are long-term investment vehicles.
- Sectoral Funds: These are refine by sectors and are very high risk but also very high return funds.
Assessing Asset Management Companies (AMCs)
Fund selection depends on the reputation and performance of the AMC involved. When selecting these funds, make sure to go for those that are being managed by good AMCs in the market. For further information on various AMCs and what they provide, you may go to our AMC Page.
Example of Top AMCs
| AMC | Top Performing Fund | Category |
|---|---|---|
| HDFC Mutual Fund | HDFC Balanced Advantage | Balanced Fund |
| SBI Mutual Fund | SBI Bluechip Fund | Large-Cap Equity Fund |
| ICICI Prudential AMC | ICICI Prudential Equity & Debt Fund | Hybrid Fund |
Final Thoughts
Selecting the mutual fund is a client-oriented issue and the most important factor that should be taken into account is your tolerance to risk. Knowing your tolerance to risk and the risk profile of various funds you will be able to establish a synergistic and cohesive investment portfolio. For more fund information a detailed fund analysis and comparison please check our Mutual Funds Screener.