Mutual funds are a smart investment for generating good returns at moderate risk. But it is not always true. There are a few risky mutual funds that you should avoid.
As a mutual fund investor, you should avoid these funds to improve returns on your investment. In this article, we will discuss the mutual funds that are bad for investing for any investor
Risky Mutual Funds That You Should Avoid
Balanced hybrid mutual funds
As a hybrid fund, it invests in both equities and debt instruments. To understand the risk of investing in a hybrid fund, you need to know the exact composition of the portfolio. A balanced hybrid mutual fund invests 40-60 percent of the corpus in equities or debt, meaning they will be treated as debt schemes during tax filing. To qualify as an equity mutual fund scheme, a fund should invest at least 65 percent of the asset in equities.
Fund of funds
A fund of funds, also known as multi-manager investment, is a complex investment product. It invests the corpus in different other funds, including hedge funds. Usually, the expense ratio of the fund of funds is higher than regular mutual funds because of higher management costs.
The management expenses involve choosing the right assets, which keep changing, resulting in substantial costs for the investor.
Tax implications are another factor that makes these funds unattractive. At the time of redemption, investors must pay taxes on short-term and long-term capital gains.
Small-cap funds invest 80 percent of the total asset into small-cap companies.
SEBI defined small-cap companies as those ranked below 250 ranks in market capitalisation. Small cap companies have a market capitalisation of less than Rs 500 crore.
Small-cap firms’ net asset value (NAV) is susceptible to the movement of the underlying benchmark, meaning returns are higher when the market grows. Conversely, small-cap funds also suffer massive losses during downturns.
Small-cap funds are suitable for risk-aggressive investors willing to take a significant risk for higher returns. Invest in these funds only if you can stomach price volatility.
Sector mutual funds
A sector mutual fund is an equity fund investing in a sector. It can be utility, energy, technology or infrastructure, with different market capitalisation.
A higher concentration of investment in one sector makes these funds vulnerable to economic performance. Since these are less diversified, the risk factor is also high. Returns from these funds depend on the sector’s performance in different economic conditions.
Credit risk mutual funds
These funds invest in low-credit quality debt instruments. As a result, the risk of investing in these funds is high. The fund manager invests in the debt tools expecting their credit score to improve. This can have a significant impact on the performance of the fund. Invest in credit risk mutual funds only if your risk tolerance level is moderate to high.
If you know where you should not invest, mutual funds are a safe investment for you. Invest in mutual funds with Angel One. Open a free Demat account with us and begin investing.
Disclaimer – This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.