No investment is risk free, whether its in bank fix deposit, insurance, stock market, gold or mutual funds. Though mutual funds offers diversification and multiple options for investment, there are few or more risks associated with this investment.
Profile Based Funds
- Aggressive funds- These funds invest a major part of their money in high risk – high returns asset classes such as Equities. These funds carry high risk as there is no guarantee on capital you have invested but at the same time those may generate high returns than traditional investments depending on the growth of companies in which funds are invested. Equity investments are also ideally considered for long term investments of over 3 years and more. The objective of such funds is to provide capital appreciation in the long run.
- Balanced funds-These funds invest close to equal amount of money in equity and bonds or such other asset classes with similar characteristics. Since a significant part of the funds is invested in bonds, the returns are low compared with aggressive funds. However, this also makes it less risky compare to aggressive funds. The objective of these funds is to provide the investors with moderate returns by taking moderate risk.
- Conservative funds – Conservative funds invest major part of the funds in bonds and cash equivalent instruments. Since bonds provide fixed return, investors consider these funds the safest of the three options but at the same time may produce lowest returns. The return is also low because of higher proportion of bonds.
Above similar categorization could be done in case of Financial Planning Portfolios. In our financial planning portfolios we may have similar categories such as Aggressive, Moderate, Conservative & Cautious with expected Risk – Return levels from high to low respectively.
Market Cap-Based Equity Funds
- Large-cap funds – These are funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Different mutual funds have different criteria for classifying companies as large cap. Generally, companies with market capitalization in excess of Rs 1000 crore are known as large-cap companies. Investing in large caps is a “lower-risk lower-return” proposition (vis-à-vis mid-cap stocks) because such companies are usually widely researched and information is widely available. Large-cap funds invest in those companies that have more potential of earning growth and higher profit. One of the major advantages of large-cap funds is that they are less volatile compared with mid-cap and small-cap funds. The near-term prospects of large-cap funds can be predicted more accurately. On the flip side, large-cap funds offer lower returns compared with mid-cap or small-cap funds. However, when compared in totality, large-cap funds outperform all other funds. These funds come under the ‘low-risk – low-return’ category. In volatile times, it is advisable to invest in large caps.
- Small & Mid-cap funds- These are funds, which invest in small and medium-sized companies. As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium-sized companies. Generally, companies with market capitalization of up to Rs 500 crore are classified as small. Those companies that have market capitalization between Rs500 crore and Rs1,000 crore are classified as medium sized.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.