What are High-risk Funds?

“No Risk, No Gain” – this proverb fits High-risk Funds very well. High-risk funds are mutual funds that are highly capable of delivering excellent returns in the future. These mutual funds help create long-term wealth and fulfill long-term financial goals such as purchasing a house, world tour, marriage, retirement etc. Investors looking to achieve such dreams and willing to take high risks can invest in these funds. So let’s go a little deeper.

What does this High-Risk mean?

An investment is a high-risk investment if there is a chance of losing a large percentage of capital or under-performance or facing a devastating loss. So, for example, if you were told there’s a half-half chance to earn an expected return, or only a 95% chance that the investment will not make an expected return, you may find that quite risky. Therefore both the likelihood and the magnitude of adverse outcomes matter.

Composition of High-risk Mutual Funds

Equity Funds are considered to be high-risk, high-return funds. Equity funds invest in stocks or shares of companies. Equity funds are of different types: Large, Mid & Small-cap Funds, Diversified Funds, sector funds, and ELSS (Equity Linked Savings Schemes).

The Mid Cap Funds and Small Cap Funds score higher on the risk meter as they invest in small & medium-sized companies that tend to have a higher risk for investors. But they have the probability of becoming successful businesses in the future & hence generating higher returns too. Professional Small & Mid Cap Fund Managers identify such high-potential stocks.

However, you can also consider some stable and less risky funds such as Large Cap funds or Debt Funds to diversify your portfolio and maintain a balance in the risk-return ratio.

Aim of High-risk Mutual Funds

High-risk Mutual Funds aim for long-term capital appreciation, and high returns are generated over time. Therefore, high-risk mutual funds are long-term investments for more than five years. In addition, high-risk Mutual Funds usually offer great dividends to investors. Therefore, if you have the mindset to take a high risk to earn good returns, you can prefer investing in these funds.

 Advantages of High-risk Mutual Funds

The primary advantage is, of course, the prospect of higher returns. The best high-risk mutual funds pay superior returns than any other investment scheme. Aggressive investors, therefore, can create wealth in the long run. In addition, mutual fund managers select funds that invest in companies growing fast and have higher possibilities to generate better returns than others. It is the reason why these companies pay higher dividends to investors. Moreover, investors falling in upper IT slabs can enjoy more tax-efficient returns than FDs.

Limitations of High-risk Mutual Funds

As the name suggests, high-risk funds are highly volatile in nature. Therefore, a high-risk fund in the portfolio needs to be actively managed, and it is crucial to regularly track these funds’ performance. Besides, it also requires a thorough review of these funds from time to time.

Who Should Invest in High-risk Mutual Funds

• Investors have a high-risk appetite.
• Investors have a good understanding of the market. It requires regular tracking of performance and making timely withdrawal decisions.
• Investors are willing and can stay invested for a long term extending up to 10 years.
• High-risk funds suit young investors well with a long investment horizon. The financial goal of the scheme must be in sync with investors’ financial plan considering the pros and cons of the schemes before investing.
• For investors looking for regular extra income, some schemes also offer dividends.

The bottom line

High-risk mutual funds also have their own set of pros and cons like any other investment scheme. These funds are for aggressive and experienced investors with longer investment horizons who can handle the risk well. Before investing in high-risk and high-return mutual funds, talk to a financial advisor to know the high-risk mutual funds that best suit your requirements.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh