Mutual funds are a very popular tool of investment. It allows investors to manage their diversified portfolios. However, like any other investment option, mutual funds involve market risks. Every investor should understand the risks associated with it. To manage the risks associated with mutual funds, it is important to be aware of the fluctuations and changes in the market. Also, one should invest in schemes under the risk-taking capability of the investor.
Managing risk in mutual funds is also important because investors will be able to balance their risk appetite and financial goals. There are two essential tools for understanding and managing risks in mutual funds: the Riskometer and the Risk Profiler. This article explains how to best use these tools to match an investor’s investments to his or her risk profile.
Riskometer is a standard tool issued by SEBI to measure risk in investments. This tool has been created to assess the potential risk in mutual fund investment schemes. Riskometer works to tell investors the risk associated with a mutual fund through the use of graphical statistics. It visually shows the level of risk for the invested principal, from minimum to maximum.
Low – In funds falling under ‘low risk’, investors can expect to have minimal risk with their principal. These funds are the right option for investors who want to keep the risk level very low.
Relatively low – A fund falls in the ‘low to moderate risk’ category, where investors’ principal comes under minimal market risk. This is the right option for people who believe in traditional investment methods.
Medium – ‘Medium risk’ funds are for investors who believe in traditional investment methods to some extent. They want to take limited risks on the invested amount to earn money.
High level of risk with limited capacity – This category includes such schemes which want to take risks on the investment amount as per the market forces. These are great options for investors who are interested in long-term investment for 3+ years for high returns.
High – ‘High Risk’ schemes are for investors who are willing to take very high risk, this is a suitable scheme for investors who want to invest for a long time (>5 years). The risk involved when investing in these schemes is very high and they are deeply affected by market fluctuations.
Very High – These schemes typically invest in high-risk equities with very volatile stocks compared to other funds. It is suitable for very aggressive investors. Here the principal invested is invested for a long time to make money. These are subject to the highest risk in the mutual fund category. This category of funds includes regional/theme-based/international/midcap/small funds.
Risk Profiler is a tool that accurately assesses the risk appetite of an investor. This is a tool that helps investors accurately estimate their risk tolerance by taking into account factors such as investment objective, time horizon and financial position. By answering the questions in the Risk Profiler, investors can understand their potential. This makes the situation clear for both traditional and aggressive investors. This self-assessment provides correct information as per the convenience and financial goals of the investors and also keeps them updated.
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