Figuring out your risk appetite is an integral part of investing in mutual funds. Mutual funds in India offer a wide variety of choices with different levels of risk and choosing among them is easier once you have figured out how much risk you can stomach.
One way to do this is by taking the help of a financial expert. They will take details from you and talk with you to figure out what level of risk will work for you and what will not. As you start investing, this will become clearer for you.
Once you have figured out your risk appetite, the next task is choosing a fund that matches your taste. Let’s discuss some factors that will help you with this.
- Choosing a type of fund that is right for you
Like said above, mutual funds come in different shapes and forms in terms of risk and choosing what works for your risk appetite is important here. Mutual funds can be divided into three categories –
- Equity mutual funds – They mostly invest your money in stocks of different companies and tend to be aggressive in nature. This is because equity is considered to be one of the most volatile investments and a mutual fund that primarily invests in them tends to share the same features. This type of mutual fund investment is ideal for investors who have a higher appetite for risk.
- Debt mutual funds – Contrary to equity mutual funds, debt mutual funds have a conservative approach. This is because a debt fund invests your money into different debt instruments which have fixed income interest as their profits and they tend to be less risky. This is ideal for investors who have a low risk appetite.
- Balanced advantage funds – Balanced funds are a mix of both equity and debt funds. They invest in equities and debts alike to grow your money and at the same time, protect the capital. This is ideal for investors who have a risk appetite that falls in the middle of the above two.
- Past performance
The past performance of a mutual fund might not reflect in the future, but it can give you an idea about the base of the fund. You can analyse the losses the fund has sustained and compare it with your risk appetite to figure out whether such a loss is acceptable for you.
You can also look at how the fund has performed during difficult economic situations. Analysing the measures taken by the fund, including changes in portfolio, will help you understand how much it is suited for you.
- Fund manager’s history
You can take a look at the fund manager and see how they have performed in the past. You can analyse the funds they have managed in the past and see how they have performed in the long term. Like in the above case, you can assess how the fund manager has handled difficult financial situations and see if their management style is suited to your risk appetite.
While it might sound tedious for some, with the amount of information available on the internet, choosing a fund based on your risk appetite is not that hard. You can always refer to the Association of Mutual Funds in India (AMFI) website and get details about any MF online.