With a range of MF schemes available, employing these tactics can help you mitigate the risks associated with investment in mutual funds and maximize the potential of this asset class.

While it is true that the world of mutual funds allows for great flexibility, the financial instrument is exposed to various systematic and unsystematic risks. They can arise from multiple factors, including domestic and geopolitical factors, that can negatively affect their performance. While fund managers do their best to mitigate risk, you can do the same by adopting these strategies as an investor.

Check Fundamentals and Risk Meter

Before investing in a mutual fund, it is critical to check its fundamentals. Check the core fund’s portfolio and make sure it is robust and that the investments are made in top companies in different sectors. Investing in a fund with weak fundamentals can lead to long-term losses.

Also, following SEBI’s dictation, AMCs now show the risk-o-meter for each fund offered. It reflects the level of risk associated with the fund. While previously the risk-o-meter emphasized the risk of a particular category, things are different now.

Invest in a fund whose risk is aligned with your risk appetite. The risk level ranges from low to very high. It is established by taking into account, among other things, liquidity risk, credit risk, interest rate risk, market capitalization and volatility.

View long-term returns

If a fund’s performance is your selection criterion, analyze its long-term performance. Most investors tend to invest based on short-term returns. Tracking long-term returns (8 to 10 years) will give you an idea of ​​how the fund has performed during the bull and bear phases.

While most funds tend to outperform when markets are on a bull run, the ability to manage losses during a bear phase really tests a fund’s mettle. Also, when checking long-term returns, look at how consistent they have been. It is better to invest in a fund that has delivered consistently high returns over a period of time than in a fund that has seen a jump in returns in 2-3 years.

Stick to large caps

While mid and small caps can provide high returns, they are a riskier bet. Therefore, limit your exposure to these funds and stick to large capitalizations that are better equipped to handle volatility and protect profits when markets plummet.

Large-caps invest in companies that are dominant players in their segment. Even if they take a hit when the markets fall, they bounce back quickly. However, that is not the case with mid and small caps, where returns can erode quite quickly in a pinch.

Don’t jump into every NFO that comes your way

In an effort to raise capital, AMCs occasionally come up with new fund offerings (NFOs). Most investors are attracted to NFOs in the lure of high returns. However, you must be careful in your approach and not invest in every NFO that comes your way. Since the offering is new, not much information is available in the public domain.

Before investing, check out what’s new in the fund and the associated costs. It is financially rewarding to invest in a fund that offers something unique than existing ones.

Conclusion

With a range of schemes available, applying the above tactics can help you mitigate the risks associated with mutual fund investments and unleash the full potential of this asset class. They help minimize risk and maximize rewards in the long run.

(By Rahul Jain, President & Head, Personal Wealth, Edelweiss Wealth Management)


This post How to reduce the risk of investing in mutual funds? was original published at “https://www.financialexpress.com/money/mutual-funds/how-to-reduce-risk-of-mutual-fund-investment/2465095/”

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