Life is full of ups and downs, joys and sorrows, and good and bad times!
Mutual funds in India also mirror this facet of life, with their highs and lows. Although various types of mutual funds are suitable for different risk appetites, every mutual fund scheme does carry some unavoidable risks. But this does not have to deter you from investing in them. Instead, you can enjoy the various advantages of investing in mutual funds by adopting these five ways to reduce their risk.
How to reduce risk in mutual funds?
1. Diversify your portfolio: Diversification is the key when it comes to investments. It refers to investing your money in a combination of assets and sectors and not concentrating your wealth in one place. This way, a loss in one investment can be offset by profits in another. When diversifying your mutual funds’ portfolio, you can focus on three primary aspects:
● Instead of concentrating in one sector, diversify into different sectors. For example, equity funds like sectoral or thematic funds only invest in one sector or theme, thereby increasing your risk. You can, instead, invest in a combination of sectoral, contra equity, and focused equity funds.
● Try to include large, mid, and small-cap funds to give your portfolio the best of all three market capitalisations.
● Invest in weakly correlated asset classes.
2. Invest through SIPs:A systematic investment plan (SIP) allows you to invest in mutual funds in small quantities regularly instead of a lump sum.
SIP is one of the most significant advantages of investing in mutual funds. It offers many benefits, one of which is risk reduction. If you invest through SIPs, you do not have to time the market. Instead, your cost of investment is averaged out with rupee cost averaging. It means that you get fewer units when the market is high, and when the market is low, you get higher units for the same amount. You can use a
SIP calculatorto determine a suitable SIP amount for yourself and start investing!
3. Check your risk profile: Risk appetite refers to how much risk you are willing to take with your invested capital. Higher risks can turn into higher rewards, but they may not offer any guarantee. Therefore, when investing in mutual funds in India, it may be better to tailor a portfolio that aligns with your risk appetite. It can help maintain a mix of equity and debt to achieve a good balance of risk and reward. You can use a risk analyser and choose the percentage of each of these mutual funds based on your risk appetite.
4. Invest for a goal: Investing in a specific goal can help you pick the right mutual fund. For instance, if your goal is to save for retirement with an investment horizon of 20 plus years, you may consider equity mutual funds. However, if your goal is short-term liquidity, you can consider liquid funds. One of the many advantages of investing in mutual funds like
liquid fundsis that they offer instant redemption, with a maturity of up to 91 days only.
5. Invest for the long term: Investing in mutual funds for the long term can help reduce risk. It can help you ride out short-term market volatility. It can also help you earn more because of the
power of compounding , where your profits are reinvested back into the market to earn higher rewards. So, it is advisable to avoid unplanned exits due to panic caused by short-term market fluctuations and instead stick around for the longer term.
To sum it up
There are many
advantages of investing in mutual funds. However, to benefit from them, it may be helpful to use these tips and mitigate risk. Moreover, instead of following in the footsteps of your peers or friends, try to analyse your unique goals and accordingly pick mutual fund schemes that support your needs.
Disclaimer: The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
The sip calculator results are based on an assumed rate of return. Please get in touch with your professional advisor for a detailed suggestion. The results are based on an assumed rate of return. The calculations are not based on any judgments of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as promise on minimum returns and/or safeguard of capital. While utmost care has been exercised while preparing the calculator, NIMF does not warrant the completeness or guarantee that the achieved computations are flawless and/or accurate and disclaims all liabilities, losses and damages arising out of the use or in respect of anything done in reliance of the calculator. The examples do not purport to represent the performance of any security or investments. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax/ financial advisor before taking any investment decision.
Risk Analyser profile results are based on individual inputs, readers are advised to seek independent professionals advice and arrive at an informed investment decision before making any investments
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.