High-Risk Mutual Funds

When it comes to investing in mutual funds, there is a wide range of investors’ risk appetites or risk profiles. Some investors prefer to stay on the safe side and opt for low-risk options. Others, however, are more willing to purchase higher-risk investments as long as there is the promise of high returns. These investors purposely look for high-risk high-return mutual funds. Here is a look at the features and benefits of high-risk mutual funds in India.

What are the features of high-risk mutual funds?

The best high-risk mutual funds share the following features:

• Higher risk-reward ratio: These mutual funds are strongly affected by market volatility; however, they can also offer the best returns. They are affected more by market volatility but outclass other mutual funds in their potential for delivering high returns.
• Allocation of assets: High-risk mutual funds invest in the stocks and shares of developing or up-and-coming companies. They do not invest in large-cap companies as those are safer in risk and generally deliver more stable returns. Small-cap and mid-cap companies are often the choices for high-risk mutual funds as they have a stronger potential for growth.
• Equity-based: High-risk mutual funds are those that most often invest in equity and equity-related instruments. 

Should you invest in high-risk mutual funds? 

High-risk mutual funds are not for everyone. They carry the potential for both high returns and losses. Investors must look at their risk appetite before they choose a mutual fund investment. You can invest in high-risk mutual funds if –

• You have an in-depth understanding of how the markets work. High-risk mutual funds require investors to proactively track their performance. For this, your knowledge of the market is important.
• You have a high risk profile. You should not have a problem exposing your investment portfolio to the inherent volatility that comes with high-risk investments. Scrutinise your capacity for losses before investing in a high-risk fund.
• You are willing to stay invested for a minimum of five to seven years. These funds shine when investors have long-term investment horizons. If you cannot stay invested for so long, you should not choose a high-risk mutual fund. The key to success lies in an aggressive yet patient perspective to investing.
• You have a balanced portfolio with parallel investments in safer mutual funds or safer investment instruments. For example, the bulk of your portfolio could be taken up by traditional investment instruments, as well as large-cap mutual fund investments. Here, a high-risk mutual fund investment will help maintain the balance and brings a significant potential to earn higher returns.
• You do not require liquidity. High-risk mutual funds offer liquidity but to benefit from capital appreciation, investors should opt for the growth option of these funds, where the profits are reinvested into the funds allowing the corpus to be compounded.

What are the categories of high-risk mutual funds in India?

The categories of the top high-risk mutual funds in India are as follows:

• Mid-cap and small-cap mutual funds: These funds invest in the stocks and bonds of mid-cap and small-cap companies. According to the Securities and Exchange Board of India (SEBI), mid-cap companies are ranked 101–250 by market capitalisation. Small-cap companies have a market capitalisation below Rs 5000 crore. These companies are developing and thus, investing in them is very risky. Small-cap funds have the potential to generate great returns but are riskier than mid-cap funds. Mid-cap funds are less risky than small-cap funds and can deliver great returns as well.
• Sector mutual funds: These mutual funds invest in specific sectors, such as technology, pharma, infrastructure, and so on. They have the potential to generate very high returns. However, they are subject to great volatility and are vulnerable to losses. Timing of the market is important when it comes to these funds.

Other equity mutual funds such as large-cap mutual funds and multi-cap/diversified mutual funds also carry risk. Large-cap funds invest in well-established large companies so their risk is much lower. Multi-cap or diversified funds adjust their portfolio according to the market situation and so, are able to manage the risk and reduce volatility.

Taxation of high-risk mutual funds

High-risk mutual funds invest in equities and the profits are considered to be capital gains. If the investor’s holding period is for less than 12 months, then short-term capital gains tax is levied against it at the rate of 15%. If the holding period exceeds 12 months, then long-term capital gains tax is applied, which is 10% on capital gains of Rs 1 lakh and above.

Summing up

As with all investments, high-risk mutual funds have their pros and cons. Along with their potential to deliver superior returns, they carry higher risk. So, you should research carefully and assess your risk appetite when investing in these funds. They can get you closer to your financial goals very fast so make an informed choice.