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.
EXPLORE FUNDS
High-Risk Funds
EXPLORE 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.

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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

Rate

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.

Conclusion

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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Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083). BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform. BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform. Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing