Moderate-risk mutual funds strike a balance between growth potential and stability. They achieve this by investing in a combination of stocks (equity) and bonds (debt instruments). This hybrid approach aims to generate returns that outperform inflation over a medium-term investment horizon (typically 3-5 years). Compared to other options, moderate-risk funds offer a middle ground in terms of risk. They are less volatile than pure equity funds, which focus solely on stocks, but carry slightly more risk than low-risk debt funds.
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:
- 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.
- Variety: There are various types of moderate-risk mutual funds, including dynamic bond funds, hybrid funds, short-duration funds, and arbitrage funds.
- 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.