What Are High-Risk Mutual Funds: Meaning, Features, Returns, and Risks

Here’s what you need to know before investing in high-risk mutual funds, so you can make informed financial decisions.
High-Risk Funds
4 mins
09 Feb 2024

Mutual funds are a popular investment option for many people in India. They offer a simple and convenient way to invest in the stock market, debt market, or both. However, not all mutual funds are created equal. Some mutual funds carry a higher risk than others, but they also offer the potential for higher returns. In this article, we will discuss high-risk mutual funds and provide a beginner’s guide to investing in them.

What are high-risk mutual funds?

High-risk mutual funds are those that invest in stocks or equity that have a higher risk of losing value. These funds are also known as equity funds or growth funds. They are designed for investors who are willing to take on more risk in exchange for the potential of higher returns.

High-risk mutual funds invest in companies that have the potential for high growth but also carry a higher risk of failure. Investing in high-risk mutual funds requires a long-term investment horizon and a willingness to accept volatility in returns.

Features of high-risk mutual funds

Here are some features of high-risk mutual funds:

  • Higher potential returns: High-risk mutual funds may offer the potential for higher returns than other types of mutual funds. However, these returns come with a higher level of risk.
  • Volatility: High-risk mutual funds are more volatile than other types of mutual funds. The value of your investment may fluctuate significantly over time.
  • Diversification: Along with equity, high-risk mutual funds may diversify the portfolio by investing some portion off the fund in debt, bonds, etc. This diversification helps to reduce the overall risk of the portfolio.
  • Long-term investment horizon: Investing in high-risk mutual funds requires a long-term investment horizon of at least 5-10 years.
  • Professional management: High-risk mutual funds are managed by professional fund managers who have expertise in investing in high-growth companies.

Advantages of high-risk funds

High-risk mutual funds can offer several advantages for investors who are willing to accept higher levels of risk in pursuit of potentially higher returns:

  1. Potential for higher returns: High-risk mutual funds typically invest in assets with higher volatility, such as stocks or emerging markets. While these investments carry more risk, they also have the potential to generate higher returns over the long term compared to conservative investments.
  2. Diversification opportunities: Some high-risk mutual funds invest in a wide range of assets, including stocks, bonds, commodities, and real estate. This diversification can help spread risk across different sectors and asset classes, potentially reducing overall portfolio volatility.
  3. Opportunity for growth: Investors with a longer investment horizon may benefit from high-risk mutual funds as they have more time to ride out market fluctuations and benefit from compounding returns. These funds can be suitable for investors seeking growth and willing to tolerate short-term fluctuations in value.
  4. Access to specialised Markets: High-risk mutual funds may provide exposure to specialised markets or sectors that are not easily accessible through traditional investments. These sectors may include technology, healthcare, emerging markets, or commodities, offering investors the opportunity to capitalise on niche opportunities.
  5. Active management: Many high-risk mutual funds are actively managed by experienced fund managers who actively monitor market trends, conduct research, and adjust the portfolio allocations accordingly. This active management may potentially lead to better investment decisions and performance compared to passively managed funds.

Taxation on high-risk funds

Investing in high-risk mutual funds can have tax implications. Here is how taxation works on high-risk mutual funds:

Type of tax


Capital gains tax

STCG Tax: 15% (for holding period less than 1 year)

LTCG Tax: 10% (for holding period more than 1 year)

Note: There is no Tax on LTCG of up to Rs. 1,00,000 in one Financial Year.

Who should invest in high-risk mutual funds?

High-risk mutual funds are not suitable for everyone. They are designed for investors who have a long-term investment horizon and are willing to accept volatility in returns. If you are a conservative investor who is not comfortable with taking on too much risk, then you should consider investing in moderate risk mutual funds instead.

Moderate risk mutual funds invest in a mix of stocks and bonds that offer a balance between risk and return. These funds are suitable for investors who want to earn higher returns than fixed deposits but do not want to take on too much risk.

What are the factors influencing high-risk mutual funds?

The performance and volatility of high-risk mutual funds are subject to various influences, including:

  • Economic conditions: Actions by the Reserve Bank of India (RBI) and the central government significantly impact these funds, with a heightened sensitivity to factors such as gross domestic product (GDP), inflation, and fluctuations in interest rates. Implementing a robust risk management strategy becomes imperative to safeguard investors from potential losses.
  • Market-Specific factors: Investor sentiments wield considerable influence over market dynamics, affecting the performance of these funds. During favorable periods, heightened risk appetite among investors can propel these funds upward, while challenging times may result in a downturn due to reduced investor confidence.
  • Liquidity risk: The inherent sensitivity of these funds contributes to lower liquidity, leading to substantial short-term fluctuations. This characteristic poses challenges for investors looking to liquidate their assets and exit the fund during periods of heightened volatility.

How to invest in high-risk mutual funds?

Here is how you can invest in high-risk mutual funds:

  1. Choose the right fund: Research different high-risk mutual fund options and choose the one that best fits your investment goals and risk tolerance. 
  2. Open an account: Open an account with an online investment platform like Bajaj Finserv that offers high-risk mutual fund investments or invest directly with the AMC.
  3. Complete KYC formalities: Complete your KYC formalities by submitting your PAN card, Aadhaar card, and other relevant documents.
  4. Invest: Once your account is set up and KYC formalities are completed, you can start investing in these mutual funds.

Things to know before investing in high-risk mutual funds

Before venturing into high-risk mutual funds, it's crucial to grasp essential factors that shape your investment strategy:

  1. Tax Implications: Tax treatment varies based on the investment duration. For instance, if you earn a capital gain of Rs. 1,00,000 from an equity fund within a year, a 15% Short Term Capital Gains Tax applies, resulting in a tax of Rs. 15,000. However, if the gain accrues after a year, a 10% Long Term Capital Gains Tax applies on the excess amount above Rs. 1 lakh, resulting in a tax of Rs. 10,000.
  2. Fund Performance: While diversifying portfolios with high-risk mutual funds, understand the the fund's expense ratio and the fund manager's track record. Analyse the performance history of the Asset Management Company (AMC) and its mutual fund against the benchmark index to gauge the potential of the high-risk mutual fund for investment.


High-risk mutual funds offer the potential for higher returns but come with a higher level of risk. Investing in these types of mutual funds requires a long-term investment horizon and a willingness to accept volatility in returns. If you are comfortable with taking on more risk, then high-risk mutual funds may be suitable for you.

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Frequently asked questions

What are high risk funds to give an example?

High-risk mutual funds encompass categories such as small-cap or mid-cap equity funds, along with funds invested in high-yield debt securities characterized by credit ratings that may be less than optimal.

Which mutual fund has the highest risk?

In India, mutual funds investing in small and mid-cap stocks are generally considered high risk. These funds invest in high potential small and mid-cap stocks, which can be volatile but may generate high returns. They are suitable for aggressive investors with investment horizons of 5-10 years or more. Also, sector-specific and thematic mutual funds are also considered quite risky because of their concentration in specific industries or themes, making them susceptible to market fluctuations and sector-specific challenges.

Which mutual fund is high-risk and high-return?

Small-cap and mid-cap equity funds are typically considered high-risk, high-return options as they invest in smaller companies with significant growth potential but heightened volatility.

How can investors assess their risk tolerance before investing in high-risk mutual funds?

Investors can assess their risk tolerance through the following steps:

  1. Financial goals: Define clear, measurable financial objectives.
  2. Investment horizon: Longer horizons often allow for higher risk tolerance.
  3. Financial capacity: Evaluate your ability to bear financial losses.
  4. Risk-return trade-off: Understand that higher potential returns often come with increased risk.
  5. Diversification: Spreading investments can reduce risk.
  6. Consultation: Seek advice from financial advisors.

Do note that high-risk mutual funds are not suitable for everyone. Always invest according to your risk tolerance and financial goals.

Is it good to buy high risk mutual funds?

The greater the risk, the greater the potential reward. Opting for high-risk mutual funds presents an opportunity for substantial returns and attractive dividends to investors. If you're inclined to take on higher risks for the prospect of earning robust returns, considering investment in these specified funds becomes a viable option.

Do high-risk mutual funds fetch high returns?

High-risk mutual funds may potentially yield high returns, but they also come with increased volatility and the risk of significant losses depending on market conditions and investment strategies.

Can new investors invest in high-risk mutual funds?

While new investors can technically invest in high-risk mutual funds, it's generally advisable for them to start with lower-risk options and gradually move towards higher-risk investments as they gain experience and understanding of the market.

Which mutual fund has the least risk?

Typically, debt mutual funds, especially liquid funds and ultra-short-term funds, are considered to have the least risk among mutual fund categories due to their investments in fixed-income securities with shorter maturities and relatively stable returns.

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