Checkpoints to evaluate your mutual fund risk

Mutual fund investment is subject to market risks. Though this market risk linked with mutual funds in India is inevitable, the fund management team can meet it to a substantial extent through sufficient analysis and research. Based upon your risk appetite, you as a mutual fund investor can be classified into conservative, moderate or aggressive categories. Checkout here how you can assess your risk profile.

Checklist to evaluate your mutual fund risk profile

From the viewpoint of an investor, risk can be defined as an unfortunate possibility of losing out some or all the original investments. And owing to this possibility of loss, it becomes important for you to decide specific factors to select different kinds of funds that hold distinct risk classifications. For instance, few investors invest in short duration mutual fund debt funds through MF online platforms where the risk level is low. Some may opt for hybrid mutual funds wherein risk is moderate while aggressive risk investors may find comfort in equity mutual funds. One common thing in all is that each mutual fund category carries a certain degree of risk.

Risk may arise from different sources. It can be from changes in the economic or political situation, industry, currency, rates, management, inflation, raw material costs and various other internal and external factors. Here are 3 major factors you must evaluate:

• Understand your risk tolerance

Your risk appetite level primarily depends upon your liquidity, income stability, and your crucial financial goals’ time horizon. For example, if you have a long-term goal, you should opt for equity funds as equities as an asset class can beat fixed income returns and inflation by a wide margin over the long term. While equities in the short term can be volatile, a longer investment horizon permits equity investments over time to recover from losses caused by market volatility. Likewise, investors facing income uncertainties may be required to put aside higher investible amount in debt mutual funds for preserving the liquidity and capital to witness periods of cash flow and income disruptions. As different mutual fund categories hold distinct levels of risk appetite, ensure to factor in your risk appetite when selecting a fund.

• Know how much time is left to attain a specific financial goal

This might be the next crucial factor in determining your risk profile. You might take higher degree of risks if you are investing to attain long term financial goals because short term volatilities might not considerably affect the performance of investment in the long term. This means, the longer the time left to attain your financial goal, the more aggressively you may invest.

While risk taking potential comes naturally as mentioned in the first point, risk profile can drastically change, as the time left to attain financial goal lowers. In simpler terms, as financial goals come closer, risk taking potential tends to fall and you must shift your equity investments to conservative portfolio to safeguard your investment portfolio.

• Review and rebalance to keep the risk profile of your portfolio intact

You may have come across the disclaimer that a mutual fund’s past performance does not indicate the same performance in future. This means that you should not expect a guaranteed return on your mutual fund investment. Thus, you should look beyond the past year’s mutual fund returns to assess it. Basically, you should ensure to monitor your investments to make an informed decision and to gain higher returns.

As you know that the capital market may fluctuate with changes in the economic conditions, these changes may hamper your asset allocation portfolio. For example, an original allocation of 60:40 in equity and debt might change to 80:20 due to market rally in mutual funds schemes. This might enhance your funds’ risk profile beyond your needs. Conducting evaluation helps you to compare your investment performance against other similar kinds of funds. Moreover, a change in the fund manager or elementary attributes of your fund might also trigger evaluation. Thus, reviewing and rebalancing are needed to keep your portfolio risk intact.