What is Risk Appetite in Mutual Funds?

What is Risk Appetite in Mutual Funds?

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Risk appetite means the willingness and ability to go through the loss of investment. How much risk an investor can take on is completely dependent upon the current financial situation along with financial needs and requirements. An aggressive investor takes higher risks to achieve higher returns. A conservative investor simply wants low returns for lower risk. Investors aged 50 years may not tolerate high risks, so their investment goals may differ from those aged 20 years who may tolerate high risks. When you are already aware of risk appetite, you can choose the right fund for you. 

Asset Class, Structural Classification, Investment Goals, Specialized Mutual Funds, and Risk Appetite are different categories in Mutual funds. Let’s discuss each type that comes under the category of risk appetite in Mutual funds. 

Very Low-Risk Funds 

Overnight funds, Liquid funds, and Ultra-short duration funds are known for their very low risk. Very low-risk mutual funds come with tenure for one day to six months.  

Overnight funds— Overnight funds are debt funds that invest your money in overnight securities. They offer residual maturity of one day.

Liquid funds— A liquid fund allows you to park money in securities like commercial paper, government securities, treasury bills, etc. They offer a residual maturity of up to 91 days. They come with no guarantee of any return like any other mutual fund investment.

Ultra-short duration funds Fixed income mutual fund schemes are ultra-short duration funds where you can put your money in debt and money market securities. They come with a Macaulay duration of 3 months to 6 months.

Low-Risk Funds 

Low duration funds and Money market mutual funds are known for their low risk. Low-risk mutual funds come with tenure for six months to one year. 

Low duration funds— Low duration funds are debt funds that allow you to invest in short term debt securities. They offer a duration of between 6 to 12 months.

Money market mutual funds— Short-term debt funds are known as Money Market Funds. You can invest in different money market instruments and enjoy good returns over up to one year. 

Medium-risk Funds 

Medium-risk funds allow you to put your money in debt and equity funds. There is not much volatility with Net Asset Value (NAV), and the average returns could be 9-12%. Covered call writing strategy, Low volatility small-cap stocks, Convertible bonds, Sector picking, and Real estate come under the medium-risk mutual funds that offer high returns. 

Covered call strategyA covered call strategy helps to generate a fixed payment called a premium. 

Low volatility small-cap stocksA small-cap stocks are generally those companies with a market capitalization of from $300 million to $2 billion. You will go through low volatility when you invest in such stocks. 

Convertible bonds A fixed-income corporate debt security is a convertible bond that allows you to gain interest payments to convert them into a specified number. 

Sector pickingSector picking is also known as sector investing. It is a top-down investment approach where you can find particular economic sectors and subsectors that can perform better and in which you can invest in big companies. 

Real estateinvestors who can’t make a direct investment in real estate can opt for these Real Estate Mutual Funds. Real Estate Investment Trusts (REITs) helps you get exposure to the sector with smaller amounts and gain good returns as professionals.

High-Risk Funds 

High-risk mutual funds are funds with great potential to generate high returns and get great dividends. These funds have high risk due to their very volatile nature. These funds suit the best for Investors who want to generate good returns by taking a high risk. You must completely and actively check how these funds perform every so often. You will come to know how your fund is performing in the market.

An Equity Fund comes under a high-risk mutual fund that offers a high return. Equity funds help you put your money in stocks/shares of companies through a SIP or lumpsum. The Net Asset Value (NAV) of your stock can get affected by gains or losses in the portfolio.

The Bottom Line

The risk appetite in mutual funds is when you accept risks for your financial goals. The more risks you take, the chance of getting profits will be higher. However, when you know about the associated risks in advance, you can efficiently achieve your expected returns. Hope this article is helpful to get your idea clear about Risk Appetite in Mutual funds. 

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