High Risk Mutual Funds

High-risk mutual funds primarily invest in stocks or equities with a greater likelihood of value fluctuations. Also referred to as equity or growth funds, they cater to investors seeking higher returns and willing to embrace increased risk.
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What are High-Risk Funds
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4 mins
21-May-2025

High-risk mutual funds are funds that invest in assets that have a higher potential for returns, but also a higher risk of loss. These funds are designed for investors who are willing to take on more risk in exchange for the potential for higher returns.

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.

Types of high-risk mutual funds

  • Equity mutual funds
    These funds invest primarily in shares of listed companies. Since stock prices fluctuate based on market performance, equity mutual funds carry higher risk but also offer potential for long-term capital appreciation.
  • Sector-specific funds (Tech, Pharma, etc.)
    These mutual funds invest in a particular industry or sector. While they may deliver high returns when the sector performs well, they are highly volatile and can underperform during sector-specific downturns.
  • Small-cap & Mid-cap funds
    These funds focus on companies with smaller market capitalisations. Though they offer growth potential, they are more vulnerable to market volatility and economic shifts, making them riskier than large-cap funds.
  • International mutual funds
    These invest in overseas markets and are exposed to currency fluctuations, geopolitical risks, and global market volatility. They offer diversification but carry higher risk due to unfamiliar regulations and foreign economic conditions.

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: 20% (for holding period less than 1 year)

LTCG Tax: 12.5% (for holding period more than 1 year)

Note: There is no Tax on LTCG of up to Rs. 1,25,000 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:

1. 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.

2. 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.

3. 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.

How to assess risk and volatility in high-risk mutual funds

Evaluating risk and volatility in high-risk mutual funds involves analyzing several key metrics:

  • Standard deviation: Measures the fund's return variability. A higher standard deviation indicates greater volatility.
  • Beta: Assesses the fund's sensitivity to market movements. A beta greater than 1 suggests higher volatility compared to the market.
  • Sharpe ratio: Calculates risk-adjusted returns by comparing the fund's excess return over the risk-free rate to its standard deviation. A higher Sharpe ratio indicates better risk-adjusted performance.
  • Alpha: Represents the fund manager's ability to generate returns above the benchmark. A positive alpha indicates outperformance.

Additionally, reviewing the fund's historical performance, portfolio composition, and the fund manager's track record can provide insights into potential risks and volatility.

Risks of high-risk mutual funds

Investing in high-risk mutual funds can offer substantial returns, but it's essential to be aware of the associated risks:

  • Market risk: High-risk funds, especially those heavily invested in equities, are susceptible to market fluctuations due to economic changes, political events, or global crises.
  • Concentration risk: Funds focusing on specific sectors or a limited number of stocks may experience significant volatility if those sectors or companies underperform.
  • Liquidity risk: Some high-risk funds invest in assets that may not be easily sold in the market, leading to challenges in redeeming investments promptly.
  • Credit risk: Particularly relevant for funds investing in lower-rated debt instruments, there's a risk that issuers may default on their obligations.
  • Interest rate risk: Changes in interest rates can affect the value of debt securities within the fund, impacting overall returns.

Understanding these risks is crucial for investors to align their investment choices with their risk tolerance and financial goals.

Rewards of high risk mutual funds

High-risk mutual funds typically invest in stocks and sectors that have substantial growth potential, offering investors the opportunity to earn significantly higher returns compared to traditional investments. When markets perform well, funds such as small-cap, mid-cap, and sector-specific schemes can deliver superior capital appreciation. They provide investors with exposure to rapidly growing industries, innovative companies, or emerging markets, thus enhancing portfolio returns over the long term. However, while the possibility of substantial profits exists, investors should approach these funds with a clear understanding of market volatility and a readiness to absorb fluctuations in pursuit of potentially greater financial rewards.

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 20% Short Term Capital Gains Tax applies, resulting in a tax of Rs. 20,000. However, if the gain accrues after a year, a 12.5% Long Term Capital Gains Tax applies on the excess amount above Rs. 1.25 lakh, resulting in a tax of Rs. 15,625.

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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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

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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 forming part of the Mutual Fund. 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.

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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 Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.