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High Risk Mutual Funds

Mutual funds come with a disclaimer that says, “Mutual-fund investments are subject to market risks, please read the offer document carefully before investing.” Why do fund houses publish or advertise this line? The answer is simple: there are no ‘risk-free’ mutual fund investments. You have low-risk investments and high-risk investments, never ones without some risk. Equity-oriented mutual funds are especially susceptible to risks associated with markets because of their underlying securities. Even within equity-oriented funds, you can opt for investing in large-cap or multi-cap funds if you are a conservative investor with a low appetite for risk. If, however, you’re an aggressive investor, keep a close watch on market movements and, have a huge appetite for risk, you can invest in high-risk mutual funds.

These funds are risky but give higher returns. There are three broad investment options for investors who have a high tolerance for risk. These are mid-cap funds, small-cap funds, and sector funds. Mid-cap and small-cap mutual fund portfolios comprise stocks that are largely medium, small and new enterprises. Some mid-cap funds may be less risky if the stocks are of established companies. Sector funds are those which focus on a sector, for example, pharmaceuticals, IT, banking, etc.

High-risk Mutual Funds Recommended by Angel BEE

High-risk funds have witnessed huge volatility in 2018, however, most market experts recommend investing in quality stock portfolios to continue to get high returns. The overall market outlook is these funds may have taken a major beating, but fund houses recommend longer investment holding periods to allow stocks to recover to give maximum benefits.

According to market reports, the first-half of 2018 saw a sharp decline in NAV of mid and small-cap stocks. Among sector funds, infrastructure, energy, and power took a huge hit in their Compounded Annual Growth Rate (CAGR), whereas IT sector funds offered a CAGR of 43.87%. By the end of 2018, all these funds came out of the slump and slowly edged toward recovery.

Fund houses and market experts always recommend an investment holding period of at least five years for any fund which is highly risky. This time-frame gives a better idea of how stocks respond to market cycles and their recovery time from downturns. Of late, the trend has shifted from hastily exiting risky under-performing portfolios to switching over to quality high-risk portfolios. Also, you should consider investing systematically via SIP, rather than investing in lump sums, before putting your money in these funds. Here are our recommendations:

Top High-risk Mutual Funds

High-risk mutual funds are only meant for investors with a high tolerance for risk and are willing to wait longer for returns on investments. The last year hasn’t been good for most of these high-risk investments like mid-cap, small-cap and sector funds. Fluctuating market cycles made mid- and small-cap stocks more volatile, while some industrial sectors themselves have undergone variations in CAGR.

Fund houses are of the opinion that you need to research each fund portfolio thoroughly before investing. Also, the top funds give great returns when they’re held for longer investment periods. In the past, these funds (mid-cap, small-cap and sector) have been known to give returns as high as 16% in a five-year holding period. In a 10-year holding period, low-risk funds can give returns of up to 15%. However, these funds can give you a rate of returns as high as 17%.

These funds are not investors who have a low tolerance for risk or are expecting higher returns in relatively shorter time-frames. As an investor, you need to have clear, realistic and medium to long-term investment goals.

Everything You Need to Know About High-risk Mutual Funds

Here’s what you need to know before investing in high-risk mutual funds:

  • Risk Appetite and Expectations of Returns: These funds are not for investors who are conservative or have a low tolerance for risk. Moreover, if you’re expecting high returns in shorter time-frames (3 years or less), then these funds are not for you. You need to have not only a huge capacity to bear the risk, but also be patient during fluctuating market cycles. These funds need a minimum holding period of 5 years to give the best returns on investment.

  • Thorough Research Required: You can’t jump into investing in these funds blindly. In the case of mid- and small-cap portfolios, you need to research individual stocks to review past performance or stay on top of new developments. If investing in sector funds, you need to be aware of any policy changes, news-stories or developments which may affect your sector fund portfolio.

  • Financial Goals: You need to define realistic and long-term financial goals before investing in these funds. The reason is, underlying securities of these fund types are highly sensitive to market movements. Any shift in market cycles (minor or major) makes individual stocks volatile. For any stock to recover, market experts recommend an investment period of at least 5 years. This also means, your financial goals should be in line with these investment time-frames.

Why High-risk Mutual Funds?

High-risk mutual funds give proportionately higher returns in the long run. Most investors prefer these because:

  • Comparatively Higher Returns: These fund portfolios may be risky, but their rate of return is proportionately higher. In most cases, the higher the risk, the higher the return. The reason for such high returns is the ability of the stocks to recover quickly from market-related losses.

  • Portfolios Do Not Run the Risk of Stagnation: Many low-risk funds are faced with the risk of flat performance or no performance over a period of 5-10 years. This again may not appear risky but is detrimental to wealth creation and growth.

  • Positive Future Outlook: 2018 was not a great year for these funds, but just as market movements are unpredictable, they’re also not constant. Market slumps do not remain that way for long periods and somewhere these make a correction. This is the reason fund houses continue to recommend investing in these funds.

  • Ability to Out-Perform Benchmarks: The stock allocation of these portfolios comprises largely of companies that are growing or developing. This means that over time the quality of stocks improves, in-turn increasing the NAV. In positive market cycles the best of these funds out-perform the benchmark, in the worst market cycles, investors can switch under-performing stocks with quality ones.

Get Better Returns with High-risk Mutual Funds

High-risk funds are curated to offer the highest returns and have a particular investment objective. How do you ensure that the portfolio you’ve chosen gives you better returns? Before we explain, you should note, we are not guaranteeing the future of markets. These are just recommendations of how you can get better returns on your investment:

  • Increase Your Appetite for Risk: These funds are not meant for conservative investors who are risk-averse, however, sometimes in extreme market conditions, some investors tend to make a hasty retreat from their high-risk portfolios. You need to have the capacity to not panic when the NAV of stocks dips below expectations, the best option is to wait until markets improve and begin moving upward.

  • Hold on to Your Investments: Though mutual fund investments can be held for short periods of three years, for your portfolio to give you best returns, you need to broaden your investment horizon. Funds which are associated with high-risk and high-reward ratios need time-frames of at least 5 years to give good returns. The best high-risk funds have been known to give annualised returns as high as 16% in a five-year period. This is higher in comparison to low-risk funds.

  • Realistic Financial Goals: You need to evaluate not only your risk-taking capacity but also define clear financial goals. Before investing in these types of funds, you need to set financial goals which can be achieved in 5 years or more. Lofty or unrealistic goals will only prompt you to make hasty or miscalculated investment decisions, which may be detrimental to your wealth.

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