What Are Moderate-Risk Mutual Funds: Know Meaning, Benefits & More

All you need to know about which mutual funds may be considered medium-risk, and how they can benefit you as an investor.
What Are Moderate-Risk Mutual Funds
4 mins
13 December 2023

Investing in mutual funds is a popular way to grow wealth in India. However, with so many options available, it can be challenging to choose the right one. In this article, we will explore moderate-risk mutual funds, which are a popular choice for investors seeking a balance between risk and reward.

What are moderate-risk mutual funds?

Moderate-risk mutual funds are investment funds that invest in a mix of equity and debt instruments. They are designed to generate inflation-beating returns over the medium term. These funds are less risky than pure equity funds and slightly more risky than pure debt funds.

These funds mainly refer to MIP funds, hybrid funds, dynamic bond funds, short-duration funds, and arbitrage funds.

These funds are suitable for investors who have a moderate risk tolerance and an investment horizon of one to five years. They can be a good choice for investors looking to achieve medium-term financial goals while being protected from the stock market’s volatility.

Features of moderate-risk mutual funds

Moderate-risk mutual funds in India have the following features:

  1. Asset Allocation: These funds adopt a diversified asset allocation strategy, investing in both equity and debt schemes, thereby striking a balance between risk and reward. The blend of equity and debt components contributes to a favourable risk-reward ratio, ensuring that potential losses from negative returns are moderate to low.
  2. Variety: There are various types of moderate-risk mutual funds, including dynamic bond funds, hybrid funds, short-duration funds, and arbitrage funds.
  3. Taxability: The tax treatment of these funds depends on their composition. The mutual funds schemes are treated as equity funds for taxation purposes if the fund’s equity assets are at least 65% on a median basis. However, if the fund’s equity assets are less than 65%, it is treated as a debt fund.

Remember that investing in mutual funds always carries some level of risk, and it’s important to thoroughly research and consider your financial goals before investing.

Advantages of moderate-risk mutual funds

Moderate-risk mutual funds in India offer several advantages:

  1. Tax efficiency: ELSS funds or LTGC on Debt Funds are more tax-efficient compared to bank fixed deposits, especially for those in higher income tax brackets.
  2. Achievement of medium-term financial goals: These funds can help you achieve your medium-term financial goals.
  3. Consistent returns with low costs: Medium-risk funds invest largely in moderately risky instruments. They also have low costs.

Disadvantages of moderate-risk mutual funds

Moderate-risk mutual funds in India, which invest across equity and debt schemes, have several disadvantages:

  1. Market volatility: The portfolio is subject to market volatility due to its investment in equity.
  2. Risks associated: The debt schemes in the portfolio are subject to interest rate risk as well as credit risk, as their rates may fluctuate. And liquidity risks
  3. Costs: Some mutual funds in India have high costs associated with them. If you exit before the stipulated time, you will have to incur exit charges.

However, the impact of these risks isn’t too high since the portfolio construction is well balanced between the two asset classes. It’s important to note that while these funds carry moderate risk, they also have the potential for moderate returns. As with any investment, it’s crucial to thoroughly research and consider your financial goals before investing.

Who should invest in moderate-risk mutual funds?

These mutual funds for the following types of investors:

  1. Investors with moderate risk tolerance: These funds are ideal for investors who are willing to accept periods of moderate volatility in the market in exchange for returns that may beat inflation.
  2. Investors with medium-term financial goals: If you have a financial goal that is one to five years away, moderate risk mutual funds could be a good fit.
  3. Investors seeking diversification: These funds can help diversify your portfolio and protect it from the volatility of the stock market.
  4. First-time investors in debt funds: Short-duration funds, which are a type of moderate risk mutual fund, can be suitable for first-time investors in debt funds.

To sum up, moderate-risk mutual funds aims to offer a balance between risk and reward, making them an ideal choice for investors seeking stable returns with moderate risk. These funds invest in a mix of equity and debt instruments, which helps to diversify the portfolio and reduce risk. However, these funds still carry market risks, so investors should carefully consider their investment objectives before investing.

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Frequently asked questions

How to invest in medium risk mutual funds?

You can invest in medium-risk mutual funds via a Systematic Investment Plan (SIP) or a lump sum method. In SIP, you need to pay a specified amount at regular intervals which can be monthly, half-yearly, or quarterly. The lump-sum method involves investing a large amount at once.

How do moderate-risk mutual funds differ from low-risk and high-risk options?

Mutual funds in India can be broadly looked at as low-risk, moderate-risk, and high-risk based on the level of risk associated with the investment. Here’s how they differ:

Risk level

Description

Investment type

Suitable for

Low-risk mutual funds

These funds aim to guard against the possibility of any loss, ensuring that none of the possible losses are catastrophic.

They have a lesser stake by definition—either in terms of the money invested or the value of the investment to the holdings.

Investors seeking security and optimal gains in the short term, such as beginners or senior citizens.

Moderate-risk mutual funds

These funds expose investors’ capital to average levels of risk. They invest in varied securities to maintain reasonable market risks against inflation-adjusted returns.

These funds mainly refer to MIP funds, hybrid funds, dynamic bond funds, short-duration funds, and arbitrage funds.

Investors with a moderate risk tolerance and an investment horizon of one to five years.

high-risk mutual funds

A high-risk investment is one in which there is a high probability of capital loss or underperformance—or a comparatively high probability of a catastrophic loss.

These are suitable for seasoned investors with a higher appetite for risk who can afford to risk a little volatility with funds invested primarily in equities.

Seasoned investors with a higher appetite for risk.

Remember, the risk associated with mutual funds is not just about the potential for loss, but also about underperformance compared to expectations. Therefore, choosing between low-risk, moderate-risk, and high-risk mutual funds depends on your individual risk tolerance and investment goals. Always consider consulting with a financial advisor before making investment decisions.

What factors should investors consider when selecting a moderate-risk mutual fund for their portfolio?

When selecting a medium-risk mutual fund for your portfolio, consider the following factors:

  • Investment objectives: Align the mutual fund with your medium-term financial goals.
  • Time horizon: Moderate-risk mutual funds are suitable for an investment horizon of three to five years.
  • Risk profile: Understand that moderate-risk mutual funds are impacted by credit risk and interest-rate risk.
  • Track record: Check the past performance of the fund against a benchmark index.
  • Expense ratio: Consider the fund’s expense ratio as it can impact the net returns.
  • Fund manager’s investment style: Understand the investment style of the fund manager to see if it is too aggressive or vice versa, for your needs.
  • Taxation: Be aware of the tax implications. For instance, dynamic bond funds and short duration funds are taxed like debt funds.