Which are the riskiest mutual funds in India: A beginner’s guide

Gautam Kalia, SVP and Principal Super Investor at Sharekhan by BNP Paribas

Sector/thematic funds in equity and high credit risk/long duration funds in debt are generally the riskiest funds, which retail investors need to understand well before investing. The main mistake that most retail investors make is that they look at the top performing funds of the past 1 year and invest in them.

The easiest way to address this is to invest in schemes that are research approved/recommended by their distributor or advisor. Also, making a financial plan before investing can set the right context and naturally lead to good fund selection.

Mr. Ashish Patil, Head – Product & Strategy, LIC Mutual Fund Asset Management Ltd.

Retail investors with a low risk appetite can avoid Credit Risk Funds as investing in Credit Risk Funds requires a high risk appetite. However, for returns due to the higher returns that credit risk funds can provide over other debt funds, investors can go for hybrid funds instead of investing in credit risk funds.

Karan Batra, Chief Product Officer, MarketsMojo

There is no one-size-fits-all answer to this question. Risk is always relative. A small cap fund may have higher perceived risk than a large cap fund, however, if the small cap fund is only a small portion of the portfolio, it may not be very risky at the portfolio level. In fact, in most cases, a small-cap fund can reduce the overall risk of a portfolio because of the added benefit of diversification.

When analyzing the risk of a fund or category, one should think about how it fits into the overall portfolio. And if the user has the benefit of some additional insight into investing, they should consider sector funds only if they are aware of the factors that affect the performance of stocks in that particular sector or about the performance of that sector. I have a very strong point of view.

Mr. Arun Kumar, VP & Head of Research, FundsIndia

Retail investors may avoid investing in high risk categories

1. Sector and Thematic Fund

Thematic/Sector funds, given their high risk-high return nature, can either give you extraordinary returns or very poor returns depending on the time frame. Investing in thematic/sector funds requires betting on four things – choosing a winning theme/sector, choosing the right funds within that theme, buying at the right valuations that already reflect the potential of the theme/sector And ability doesn’t have value. Timely entering and exiting the theme/sector (i.e. correctly identifying the cycle and investing near its beginning and exiting when it reaches its peak). In our view, the chances of getting all 4 of the above on an ongoing basis are very low and the payoff can only be worthwhile if we get these right.

Unlike in the case of diversified equity funds, where buying and holding well performing funds for the long term can work well, this may not always be the case for such funds.

Investors often put money in these funds at the wrong time, only to be disappointed. The long term performance figures for most thematic funds are mediocre.

Given their non-diversified exposure, high risk profile and the need to time both entry and exit, we would suggest avoiding sector funds and sticking to well-diversified equity funds.

2. Credit Risk Fund

We remain negative on the credit risk category despite the high yield potential, given the inherent liquidity risk due to the open-ended structure (read as high redemption risk).

Credit Risk Funds have high exposure to low rated debt securities in Indian markets which have low liquidity (cannot be sold immediately in the market at fair valuation). In times of stress, liquidity becomes even tighter for such low-rated paper as everyone becomes risk-averse and only wants to lend to higher-rated corporates.

Thus Credit Risk Oriented Funds which invest predominantly in illiquid low rate paper, have significant and frequent redemptions in case of liquidity risk.

Nitin Rao, Head Products & Offers, Epsilon Money Mart

We have often heard, ‘The higher the higher the return.’ Not necessarily, as the risks must be known before getting involved. It is quite possible that the high risk is not commensurate with the kind of returns that they offer. Hence, before taking the plunge, retail investors should be careful:

A. Thematic or Sectoral Funds: These funds invest at least 80% of their corpus in businesses related to a single sector or theme. Now since businesses move in a cycle with top performers changing frequently, they may or may not perform as the fund will depend on the performance of the stocks in that sector. This increases the risk of the portfolio as it is less diversified. For example: Investors had a tough time when the IT sector took a beating last year.

B. Long Term Funds: These funds invest in debt papers with a minimum maturity of 7 years. This makes them highly sensitive to interest rate changes; When interest rates rise, bond prices fall, resulting in a negative NAV. We are currently seeing a similar scenario with RBI continuing to hike. Thus, both entry and exit become equally important.

Thus, mutual funds are relatively safe if you know what you are doing. They should be in line with your investment objectives and all relevant factors.

Manjeet Singh, Associate Partner Alpha Capital

While we all have heard of the popular saying “higher risk equals higher return” but mutual fund investors can avoid high risk mutual funds as long as they make a well-informed decision for higher returns. not be able to

Sectoral Fund: These are the riskiest category of equity mutual funds that invest at least 80% of their portfolio in companies belonging to a single sector. Low diversification adds to their overall risk, with returns dependent on the performance of any one sector. Examples could be technology funds, infrastructure funds etc.

credit risk fund These funds invest in debt papers with low credit quality. They take credit risk by investing at least 65% of assets in papers with low credit rating which may be AA or less. While these can offer higher rates and returns to investors, the risk of losing principal makes them avoidable.

long term funds These funds invest in securities with a maturity of more than 7 years, making their price highly sensitive to interest rates. Any increase in the interest rate can bring down their value drastically so investors may avoid it unless they are sure of interest rate fall and want to take an informed risk to make higher returns.

Disclaimer: The views and recommendations given above are those of individual analysts or broking companies and not of Mint. We advise investors to do due diligence with certified experts before making any investment decision.