A Beginners Guide to the Riskiest Mutual Funds in India

Investing in mutual funds can be a great way to grow your wealth over time, but it's essential to understand the risks involved, including credit risk funds, thematic or sectoral funds, long-duration funds, and small-cap funds, and to choose the right mutual fund.

Riskiest Mutual Funds in India

Investing in mutual funds can be a great way to grow your wealth over time, but it is essential to understand that not all mutual funds are created equal. Some mutual funds are considered riskier than others and may not be suitable for beginners dabbling in the market.

Let's discuss India's top high-risk mutual funds and some tips for beginners to consider before investing.

Understanding Risk in Mutual Funds

Before diving into India's top most risky mutual funds, let's first understand what risk means in mutual funds. In simple terms, risk refers to the possibility of losing money when investing in a mutual fund. Every mutual fund carries some risk, but the level of risk varies depending on the type of fund.

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Some mutual funds invest in high-risk assets like stocks or bonds, while others invest in low-risk assets like government bonds or treasury bills. Generally, the higher the risk, the higher the potential reward, which also means a higher possibility of losing money.

Top Most Risky Mutual Funds in India

  • Credit Risk Funds

One of the riskiest mutual funds in India is credit risk funds. These funds invest in corporate bonds with high credit risk, meaning the issuer is more likely to default. As a result, these funds offer higher returns than other debt funds but come with a higher risk of losing money.

Staying away from credit risk funds is advisable for beginners, as they require a deep understanding of the credit markets.

  • Thematic or Sectoral Funds

Thematic or sectoral funds invest in a specific sector or theme, such as technology, healthcare, or infrastructure. These funds can be advantageous if the industry or theme performs well but can also be highly volatile and risky.

For example, if you invest in a technology fund and the technology sector goes through a downturn, you may lose significant money.

  • Long Duration Funds

Long-duration funds invest in long-term debt securities with more than seven years of maturity. These funds are susceptible to interest rate changes and carry a high-interest rate risk. If interest rates rise, the fund's value may fall, resulting in a loss for the investor.

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  • Small-Cap Funds

Small-cap funds are considered among India's most riskiest mutual funds due to their high volatility and potential for significant losses. However, a small-cap fund can reduce overall risk by providing additional diversification benefits if used strategically as part of a diversified portfolio.

Nevertheless, beginners must have a solid understanding of the stock market before investing in small-cap funds.

How to Choose the Right Mutual Fund

Choosing the right mutual fund can be challenging, especially for beginners. Here are some tips to consider before investing in a mutual fund:

  1. Determine Your Investment Goals: Are you looking to grow your wealth long-term or generate regular income? Different mutual funds are designed for other investment goals.

  2. Assess Your Risk Tolerance: If you are risk-averse, consider low-risk funds like government bond funds or money market funds. On the other hand, if you are comfortable with higher risks, consider equity funds.

  3. Research the Fund:  Look at the fund's historical performance, expense ratio, and the fund manager's track record. Ensure that the fund aligns with your investment goals and risk tolerance.

  4. Diversify Your Portfolio: Diversifying helps spread the risk and minimise the impact of market volatility.

Final Thoughts

Investing in mutual funds can be a great way to grow your wealth over time, but it is essential to understand that only some mutual funds are suitable for some. As a beginner, it is vital to stick to low-risk funds and follow the tips outlined in this article.

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