Which mutual funds are for you if you have a good risk appetite?

Mutual funds are an investment avenue that gives you access to investment in multiple securities through a single investment in the fund. You invest in a mutual fund scheme who in turn invests in several securities. The market today in flooded with several types of mutual funds offering varied return opportunities, different risk profile and catering to different investment objectives. Broadly mutual funds schemes are categorised into equity, hybrid, debt, Solution Oriented Schemes and Other Schemes.

So how do you choose which type of mutual fund schemes to opt for in your investment portfolio?

Are you a young investor, at the start of your career with limited personal responsibilities? Or have you allocated a part of your portfolio towards seeking out high growth albeit with possible high-risk exposure?

These mean that you may have a relatively good risk appetite.

What does it really mean to have a good risk appetite?

Let’s first understand what is meant by ‘risk’ when we talk about investing in mutual funds. Having a good risk appetite means an investor is willing to bear risk of low returns as well as risk of losing principal value in periods of volatility in exchange for the potential of higher-than-average return on his investment.

So, are you looking for potential high growth options? If yes, then you may wonder what kind of mutual funds schemes are right for you?

Let's take a look....

Suitable fund categories that can be for good risk appetite:

Typically, equity-based funds are said to have higher risk than debt with the potential for reasonable return and growth in the long run.

Listed below are few of the categories of Equity Schemes:

1. Mid cap funds

   Mutual funds that invest in mid cap companies could be one of the options. Mid cap can be defined as 101st -250th company in terms of full market capitalization. Mid cap Funds predominantly invests in mid cap stocks. These are expected to have long term growth potential. Fund managers seek out fast growing stocks in this category that may have the potential to become the leaders of the future.

2. Small cap funds

   Small cap can be defined as 251st company onwards in terms of full market capitalization. Small cap Funds predominantly invests in small cap stocks. These funds could also suit investors with a reasonable risk appetite. These funds invest in smaller, less established companies who are at the start of their growth path. These funds seek out those companies within the small cap segment that have strong fundamentals and have the potential for growth in the years to come.

3. Value funds

   These are mutual funds that invest in companies following a value investment strategy & have good value based on evaluation of their business model, strength of their financials and management, however, are being undervalued by the market. Fund managers seek out these companies with the intent to earn reasonable returns when the true value of these stocks is discovered by the market. These are sought out through fundamental analysis. The risk entailed here is that it may take time for the stocks within these funds to be recognised for their intrinsic value and begin generating reasonable than average returns.

4. Sectoral/ Thematic funds

   These funds invest in stocks within a specific sector or a specific investing theme. So, for example they may invest only in the banking sector, only in pharma companies etc or around a specific theme such as ESG funds, Special Opportunities themes etc. Fund managers seek out industry leaders with strong fundamentals from the same sector or that follow a common theme, to provide growth opportunities to the investors. These funds do entail a sector/theme specific risk as their diversification is limited and they are highly dependent on the performance of one sector/theme. So, based on your research and analysis, if you can choose and invest in the right sectoral/thematic fund at the right time then you may have a chance of earning reasonable returns) by investing in sectoral funds.
   
   Click here to check - What is thematic investing?

Keep this in mind before you select your choice of fund:

As an investor you must keep in mind that these funds being equity based can be one of the avenues from a long-term perspective. You should look to stay invested for a long-term period of 5 years or more to look to know the outcome from these funds. Also note that it is not only risk appetite that defines your investment portfolio. Other aspects such as return requirement, investing horizon and investing objectives, etc. are also to be considered. All these aspects in conjunction with risk appetite must be considered before deciding on the appropriate mix of funds in your portfolio.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.