Some find mutual funds to be one of the most exciting investment options. And some find it even more exciting to choose high-risk mutual funds. If you’re one of those people driven by the thrill of it all, read this. Because there are some things you absolutely must know before you venture anywhere near them.
What are high-risk mutual funds?
Well, it’s simple. Mutual funds made up of small and mid-cap investments are called high-risk mutual funds. They might provide you with higher returns, but they also come with high risks. Also, among the two, small caps carry more risk than mid-caps.
High-risk mutual funds features
Before investing in high-risk mutual funds, you need to understand them well. That’s why we present to you some of the key features associated with these funds.
- Risk-reward ratio: High-risk funds are also high-return mutual funds. So, you can expect to get higher profits in the end if you invest in them. These funds invest in highly volatile securities and emerging companies. The scheme’s volatility is likely to average out in the long term, but there is no certainty with these things.
- Types: This is a single type of fund. Investors have multiple schemes to choose from within the high-risk category. For instance, you could look at hybrid equity funds, hybrid debt funds, funds of funds, or balanced funds, too.
- Asset allocation: These funds invest in highly volatile securities—startups and other emerging companies, for example. The asset allocation strategy plays a key role in the fund’s performance.
- Investment duration: High-risk funds are a long-term investment option. Because the investments are volatile, it helps to look at a long duration, allowing time for the losses and gains to average out.
- Investment objectives: High-risk funds focus on capital appreciation. So, they are better suited for long-term goals, such as saving for retirement.
That said, remember, you can always invest in other schemes, too, along with high-risk mutual fund investments.
Things to know before investing in high-risk mutual funds
Before you invest in a high-risk mutual fund, you need to know a few things. These factors can also help you figure out how to create a fund that works for you.
- It is important that you fully understand the securities that the fund is investing in.
- It is better to reserve smaller sums for high-risk mutual funds.
In addition to these two basic pointers, it may also help to keep two things in mind.
If you are going to invest in high-risk mutual funds, you will have to pay taxes on your gains. In India, a 15% tax applies to the gains from short-term investments in high-risk shares. Plus, you will need to pay tax on the dividends, too. With long-term investments, a 10% tax applies for gains beyond ₹1 lakh. Long-term gains under ₹1 lakh are exempt from taxation. So, this investment and the return are taxable.
2. Fund track record
It is essential to know about the track record of your high-risk mutual fund before investing. You need to look into its performance for at least the past two years. This applies to all high-risk stocks in India.
Significant advantages of high-risk funds
If you’re looking for high-risk mutual funds, you probably know that they come with the best returns. Being a mutual fund of course, these funds spread out your money across different assets, so there is some safety to be had there in comparison to direct investments.
However, with high returns, higher risks are indispensable. This is only attractive if you want to play aggressively and are comfortable losing money.
Who should invest in high-risk mutual funds?
These mutual funds are not for everybody. They tend to work better for some categories of investors, including:
- Young investors who don’t have a lot of financial commitments and can afford to lose some money.
- Small investors.
- Long-term investors.
- Those with a high-risk appetite.
Top 3 performing high-risk funds to invest in 2023
Finally, here are three of the best-performing high-risk funds at press time for you to look up. However, don’t forget to do your research and make sure you are ready for the ups and downs that come with them.
- Sundaram Equity Hybrid Fund: 30.1% return on investment
- Axis Gold Fund: 16% return on investment
- HDFC Gold Fund: 15.2% return on investment
The bottom line
Well, the bottom line is don’t let anyone convince you to make high-risk investments if you are 100% on board. Remember, if you are risk-averse or are looking at the short-term horizon, a hard pass may be a better bet.