While it’s true that the world of mutual funds allows for great flexibility, the financial instrument is exposed to various systematic and unsystematic risks. They can emanate from multiple factors, including domestic and geopolitical, that can adversely affect their performance. While fund managers do their best to mitigate the risks, you can do the same by adopting these strategies as an investor.
Check Fund Fundamentals and Riskometer
Prior to investing in a mutual fund, it’s crucial to check its fundamentals. Check the core fund portfolio and make sure they are robust and the investments made are in top companies across sectors. Investing in a fund with weak fundamentals can result in losses in the long run.
Also, post-SEBI’s diktat, AMCs now showcase the risk-o-meter for every fund on offer. It depicts the level of risk associated with the fund. While earlier, the risk-o-meter highlighted the risk associated with a particular category, the case is different now.
Invest in a fund whose risk aligns with your risk appetite. The level of risk varies from low to very high. It is arrived at by considering liquidity risk, credit risk, interest rate risk, market capitalisation, and volatility, among others.
Check Long-term Returns
If a fund’s returns are your selection criteria, analyse long-term returns. Most investors tend to invest by returns generated in the short term. Tracking long-term returns (8 to 10 years) will give you an idea of how the fund has performed during bull and bear phases.
While most funds tend to perform well when markets are experiencing a bull run, the ability to contain losses during a bear phase truly tests a fund’s mettle. Also, while checking long-term returns, find out how consistent they have been. It’s better to invest in a fund that has consistently delivered high returns over a period of time than a fund that has experienced a spurt in returns in 2-3 years.
Stick to Large-caps
While mid and small caps can deliver high returns, they are a riskier bet. Hence, restrict your exposure to these funds and stick to large caps that are better equipped to handle volatility and protect the gains when markets nosedive.
Large-caps invest in companies that are dominant players in their segment. Even if they take a hit when markets are down, they quickly bounce back. However, that’s not the case with mid and small caps, where returns can erode pretty soon in no time.
Don’t Jump into Every NFO Coming Your Way
In a bid to raise capital, AMCs come up with new fund offers (NFOs) now and then. Most investors get attracted to NFOs in lure of high returns. However, you should be prudent in your approach and not invest in every NFO coming your way. Since the offering is new, there isn’t much information available in the public domain.
Before investing, see what’s new in the fund and the associated costs. It’s financially rewarding to invest in a fund offering something unique than existing ones.
Conclusion
With a range of schemes available, adopting the above tactics can help you counter risks associated with mutual fund investment and leverage the potential of this asset class to the fullest. They help minimise risk and maximise reward in the long run.
