Investing in MF? This is how you check how risky your fund is. | Jobs Vox


There is inherent risk involved in mutual fund investments. However, more and more people continue to invest in them, believing that the returns they generate will help them beat inflation and ensure financial independence in the long run. The amount of risk in any mutual fund depends on the underlying securities, which may include stocks, bonds and fixed income instruments. This is why mutual funds are primarily classified as equity, debt and hybrid depending on the industry exposure.

Risks in equity mutual funds

Beyond asset class risk, mutual fund investors are exposed to both systematic and unsystematic risk.

Systematic risk It is related to marketing activities. Due to various macro factors, stock prices have been falling, which has brought down the overall market. All equity mutual funds and equity related instruments including balanced leverage and hybrid funds lose value due to their high asset allocation in stocks. Examples are exchange-traded funds (ETFs) and index funds, which are exposed to market risks.

Unsystematic risk It does not destroy all mutual funds at once because it is associated with the risks associated with a particular stock or sector. This type of risk affects sector funds or sector-based indices. The only way to avoid these risks is to diversify sufficiently. Do not invest in mutual funds that only invest in one type of stock. Don’t stick to just one sector. This type of risk occurs when the fund manager is overconfident or overconfident about certain stocks or sectors. The weightage of those stocks or sectors relative to the market benchmark index is what determines the underlying risk factor. However, this type of risk is not present in ETFs and index funds and both invest in a basket of securities.

Risk indicators in equity funds

Now that you know the risks involved in mutual funds, it’s helpful to learn about some risk indicators to help you choose which ones to avoid or keep. Some important risk indicators include:

Standard DeviationIt is a measure of the standard deviation of the monthly return of a mutual fund scheme from the standard deviation of the average return. It is a measure of the flexibility of the program. The greater the standard deviation, the greater the risk.

Sharpe ratioThis is largely overlooked as very few investors know about it and realize its importance while choosing a mutual fund from among the many funds available. The Sharpe ratio is defined as the average rate of return divided by the standard deviation of the risk-free rate (eg T-Bill rate of interest, overnight bank rate such as MIBOR, etc.). The Sharpe ratio is a measure of risk-adjusted return. The higher the Sharpe ratio, the higher the risk-adjusted return. This ratio is based on how much income you can reap for a given amount of risk.

BetaHow sensitive is your mutual fund to market movements? Will the market significantly erode your mutual fund income? These are important factors while investing in any mutual fund units. Basically, beta measures the market volatility of a mutual fund portfolio. When you test mutual fund beta, you learn how your investment reacts to market fluctuations. The market in this context usually refers to the benchmark index that the currency follows. A beta less than one indicates low volatility, a beta greater than one indicates high volatility compared to the benchmark index.

AlphaAlpha is the risk-adjusted return above the market benchmark. It is the additional return generated by the fund manager as a result of active stock selection. A higher alpha emphasizes the fund manager’s ability to generate higher returns relative to the benchmark index.

If alpha is equal to 0, it emphasizes that the fund manager’s performance graph is in line with the benchmark index. However, negative alpha can be depressing. Additionally, a higher alpha in a mutual fund over and above 0 indicates the ability of the fund manager to outperform the benchmark index.

Risks in debt mutual funds

Debt funds typically carry two types of risk.

Interest rate risk It depends on macro factors as it depends on whether interest rates go up or down. This is because how bonds and non-convertible debentures (NCDs) are sold depends heavily on market interest rates. If the interest rate in the market goes up, the value of the bond will go down. This mutual fund investment in these bonds results in lower NAVs.

Fixed income Credit risk It indicates that the issuers default on their interest and/or principal payment obligations, exposing the investor to potential loss of income and/or capital. If the issuer does not make interest and principal payments, the value of the instrument will be written permanently in the NAV of the debt program and the investor may suffer a loss.

Risk indicators in debt funds

These funds carry risks that you can assess by looking at the following risk indicators.

Length of stayA long-term fund has more interest rate risk than a short-term fund, but a long-term fund can generate higher returns over longer investment periods because the yield of a long-term fund is higher than that of a short-term fund. The tenure and/or maturity profile of the scheme is available in the fund’s prospectus. You should invest based on your affordability and how long you can stay invested in the fund.

Credit qualityCredit rating agencies assess credit risk and assign credit ratings to debt or money market instruments such as commercial paper (CPS), certificates of deposit (CDs), non-convertible notes (NCDs), and the like. Lower-rated bonds offer higher yields than higher-rated bonds, but the credit risk is higher. Credit ratings for debt and money market holdings are specified in fund fact sheets for individual schemes by asset management companies (AMCs). To make sound investment decisions, you must first understand credit risk.

Using Riskometer

Mutual fund companies highlight the risks associated with a graphic representation of how risky the fund will be. A scheme’s ‘Riskometer’ between “low” and “very high” can tell you a lot about what to expect from the fund’s performance in terms of market activity. In Riskometer, schemes are now classified as low to medium, medium high, high and very high risk.

Every asset management company should indicate the risk level of each existing or upcoming plan. Riskometer for each product or scheme is available in monthly fund fact sheets and on fund companies’ websites.

SEBI has revised the Riskometer in August 2021 to determine risk based on scheme securities using market capitalization, volatility and liquidity as risk assessment parameters. Riskometer helps investors understand risk at the planning level.


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First published: December 16, 2022, 11:27 am IST

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