Which are the top most risky mutual funds in India: A beginner's guide (2024)

Gautam Kalia, SVP & Head Super Investor at Sharekhan by BNP Paribas

Sector/Thematic funds in Equity and High Credit Risk/Long duration funds in Debt are usually the riskiest funds that Retail investors need to understand thoroughly before investing. The key mistake that most retail investors make is that they just look at top-performing funds for the last 1 year and invest in those.

The easiest way to address this is by investing in schemes that are research approved/recommended by their distributor or advisor. Further still, getting a financial plan made before investing can set the right context and naturally lead to good fund selection.

Mr. Ashish Patil, Head - Product & Strategy, LIC Mutual Fund Asset Management Ltd

Retail investors with low risk tolerance may avoid credit risk funds as investing in credit risk funds requires high risk appetite. However, for the returns due to higher yields which credit risk funds may provide over other debt funds, investors may go for hybrid funds rather than investing in credit risk funds.

Karan Batra, Chief Product Officer, MarketsMojo

There is no one-size-fits-all answer to this question. Risk is always relative. A small cap fund may have a higher perceived risk than a large cap fund, however, if the small-cap fund is only a small part of the portfolio, it may not be very risky on a portfolio level. In fact, in most cases, a small-cap fund might reduce the overall risk of the portfolio because of the added benefit of diversification.

While analyzing the risk of a fund or category, one must think about how it fits in the overall portfolio. And if the user has some added information advantage in investing, they should consider sector funds if they are aware of the factors that affect the performance of stocks in that particular sector or have a very strong view of that sector’s performance.

Mr. Arun Kumar, VP and Head of Research, FundsIndia

Retail investors can avoid investing in high-risk categories such as

1. Sector and Thematic Funds

Thematic/Sector funds given their high risk-high return nature, can either give you exceptional returns or extremely poor returns depending on the timing. Investing in thematic/sector funds requires taking a bet on four things going right - Picking a winning theme/sector, selecting the right fund within that theme, buying at the right valuations which haven't already priced in the theme/sector's potential & ability to enter and exit the theme/sector at the right time (i.e identifying the cycle correctly and investing closer to its start and exiting as it starts to peak). In our view, the odds of getting all the above 4 right on a consistent basis are very low and the payouts can be meaningful only when we get these right.

Unlike in the case of diversified equity funds, where buying and holding a well-performing fund for the long term can work well, this may not always be so for such funds.

Investors have often piled into these funds at precisely the wrong time, only to be disappointed. The long-term performance figures for the majority of thematic funds are mediocre.

Given their non-diversified exposure, higher risk profile and the need to time both entry and exit, we would suggest avoiding sector funds and sticking to well diversified equity funds.

2. Credit Risk Funds

Given the inherent liquidity risk due to the open-ended structure (read as risk of high redemptions), we continue to remain negative on the credit risk category despite higher yield potential.

Credit Risk funds have higher exposure to lower rated debt securities that have low liquidity (read as cannot be sold immediately in the market at fair valuation) in Indian markets. During times of stress, the liquidity for such lower rated papers becomes even more tight as everyone becomes risk averse and wants to lend only to higher rated corporates.

Thus Credit risk oriented funds which predominantly invest in illiquid lower rated papers have liquidity risk in case of significant and continuous redemptions.

Nitin Rao,Head Products and Proposition, Epsilon Money Mart

We have often heard, ‘higher the higher the returns.’ Not necessarily, as one should know about the risks before getting into it. It is quite possible that higher risk doesn’t commensurate with the kind of returns that they deliver. Therefore, before taking the plunge, retail investors should be watchful of:

A. Thematic or Sectoral funds: These funds invest at least 80% of their corpus in businesses belonging to the same sector or theme. Now since businesses move in a cycle with top performers changing quite frequently, they may or may not perform as the fund will depend on the performance of the stocks in that sector. This increases the risk of the portfolio as it is less diversified. For example: investors were having a tough time when the IT sector took a beating last year.

B. Long Duration funds: These funds invest in debt papers with a maturity of at least 7 years. This makes them highly sensitive to interest rate changes; when interest rate rise, bond prices fall, resulting in a negative NAV. We are currently witnessing the same scenario with RBI on a continuous hike spree. Thus, both entry and exit become equally important.

Thus, if you know what you’re doing, mutual funds are relatively safe. They should be in align with your investment objectives and all relevant factors.

Manjit Singh, Associate partner Alpha capital

While we all have heard of popular saying “high risk equals high returns “ but mutual fund investors can avoid below high risk mutual funds unless they are able to take a well-informed decision for higher returns.

Sectoral funds: These are the riskiest category of equity mutual funds which invest a minimum of 80% of their portfolio in companies belonging to the same sector. Low diversification adds to their overall risk with returns dependent on the performance of a single sector. Examples could be technology funds, infrastructure funds etc.

Credit Risk Funds - These funds invest in debt papers with lower credit quality. They take credit risk by investing minimum 65% of assets in papers with lower credit ratings which could be AA or below. While these can give higher rates and returns to investors the associated risk of losing principal makes them avoidable.

Long Duration funds - These funds invest in securities with maturity more than 7 years making their price highly sensitive to interest rates . Any rise in interest rate can make their value fall significantly hence investors can avoid unless they are very sure of falling interest rate and want to take an informed risk for making higher returns.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 01 Mar 2023, 07:59 PM IST