How can Investing in High Risk Mutual Fund Bring High Returns ?

High-risk mutual funds are generally those funds which typically invest in low graded securities or companies whose information is not readily available in the public domain. Funds investing in small caps also fall in the category of high-risk funds. It’s a general belief that investing in these funds can bring high returns.

It’s a misplaced notion that investing in high-risk mutual funds will always fetch high returns. While sometimes they may offer bumper returns, more often than not, returns from such funds are negative, particularly when the markets are going through a bear phase as is the case now due to Covid-19.Funds which invest in low-graded securities or companies whose information is unavailable in the public domain often bear the brunt in case of extreme volatility. Understand that it’s a fund’s underlying holdings that generate returns and when they fail to perform well, the returns suffer.Particularly during pressing times, such as the one we have now due to Covid-19 pandemic, when markets are in a bear phase, the fundamentally-weak funds are the ones who suffer the most. During a bull run, they may offer spectacular returns, but markets go through various cycles and during a downturn, the gains made over the year are wiped within seconds.

Before investing in a high-risk mutual fund, you should be mentally prepared to take the beating when the markets turn turtle. Therefore, it’s advisable to invest in them only if you have a high-risk appetite. In other words, if market volatility doesn’t make your jittery or you have the stomach to bear losses, then you can invest in them.On the other hand, if you can’t withstand seeing your gains eroding due to market swings, it’s better to stick to large-caps which offer stable returns in the long run. The core holdings of large-caps are fundamentally-sound companies with robust balance sheets and corporate governance. They are better structured to withstand market volatility and protecting your portfolio from taking a major hit.At the same time, check out the performance of a fund in the long run, particularly against its benchmark indices. It’s advisable to opt for a fund that has delivered consistent returns in the long run. The final word If, however, you decide to invest in a high-risk mutual fund, it’s advisable to start small and not commit a lump sum. Invest via systematic investment plans (SIP) which average out the risk with time. Also, through SIPs, you can buy more units when the markets are down at the same price than you would do otherwise.Also, before investing, compare different high-risk funds and see their core holdings and returns they have generated over the years. Today, there are many portals which readily display different funds and their returns. Browse them before making a final choice.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.