How To Optimise Returns with High-Risk Mutual Funds?

Investing in mutual funds is a popular way to grow your money. Among the different types of mutual funds, high-risk mutual funds offer the potential for high returns. However, these funds also come with greater risks. Let’s take a look at what high-risk mutual funds are, strategies for maximising returns, managing risks, and when to exit.

• Table of contents

1. Understanding high-risk mutual funds
2. Strategies for optimising returns with high-risk mutual funds
3. Risk management and exit strategies
4. Features of high risk and high return potential mutual funds
5. Who can consider investing in high risk mutual funds?
6. Benefits of investing in high risk and high return potential mutual funds
7. What are the returns on the high-risk mutual funds and how are they calculated?

Understanding high-risk mutual funds

A high-risk mutual fund is a type of mutual fund that invests in assets with higher potential returns but also higher risks. These funds typically invest in stocks of small or emerging companies, sectors with high growth potential, or markets that are very volatile. Because of the higher risk, the returns can be potentially much higher compared to low-risk funds. However, there is also a greater chance of losing money.

Strategies for optimising returns with high-risk mutual funds

• Research and select the right fund: To optimize return with high-risk mutual funds, it is important to choose the right fund. Look at the fund’s past performance, the experience of the fund manager, and the sectors it invests in. Compare different high-risk funds before making a decision.
• Diversify your investments: It’s important not to put all your money into one high-risk mutual fund. Spread your investments across different high-risk funds or combine them with other types of investments. This can reduce the overall risk.
• Invest for the long term: High-risk mutual funds are often more volatile in the short term. Investing for a longer period can help smooth out the highs and lows, increasing your chances of higher returns.
• Regularly review your portfolio: Keep an eye on your investments and review them regularly. This will help you stay informed about how your high-risk mutual funds are performing and if you need to make any changes.

Risk management and exit strategies

When investing in high-risk mutual funds, it is essential to understand risk management and exit strategies. The following are some things that you can do to balance the risk and reward in a high-risk mutual fund.

• Set clear goals and limits: Before investing, set clear financial goals and decide how much risk you are willing to take. Doing this can help you limit your losses, optimize your gains, and make sound decisions.
• Use stop-loss orders: Making use of a stop-loss order is a good way to contain your losses. If the value of your investment falls below a certain point, the stop-loss order will automatically sell your investment, preventing further losses.
• Rebalance your portfolio: As the value of your investments change, the balance of your portfolio can shift. Regularly rebalancing your portfolio can help you maintain the desired level of risk.
• Know when to exit: It is important to know when to sell your high-risk mutual funds. If your investment has reached your target return, or if the risks have increased beyond your comfort level, it might be time to exit.

Investing in high-risk mutual funds can be a good way to optimize returns, but it is important to understand the risks involved. By carefully selecting the right funds, diversifying your investments, and regularly reviewing your portfolio, you can increase your probability of attaining success in investments. Remember to manage your risks and know when to exit to mitigate impact on your investments. With the right approach, you can make high-risk mutual funds work for you.

Features of high risk and high return potential mutual funds

High-risk, high-return potential mutual funds cater to investors with a higher risk tolerance and a long-term investment approach. These funds focus on assets with greater growth potential but also present a higher chance of loss. Here are some important aspects of such funds:

Equity-oriented: These funds are typically equity-oriented, investing in equity or equity-related assets such as stocks of large, mid or small cap companies.

Potential for growth: The main goal is to achieve capital appreciation in the long term by targeting companies or sectors expected to growth, thus offering relatively better returns than traditional saving avenues or fixed-income funds.

High volatility: Due to their equity-based focus, these funds tend to be highly volatile and their can fluctuate considerably in response to market movements, economic changes, or company news.

Long-term investment horizon: These funds are suitable for investors planning to invest for 5-7 years or more. This time frame can help investors potentially weather market fluctuations and harness the long-term growth potential of the investments.

No guarantee of returns: It's important to understand that high-risk, high-return potential mutual funds do not guarantee returns. The value of your investment can vary significantly, and you can potentially lose part or all of your capital.

Who can consider investing in high risk mutual funds?

Investors who identify the following can consider investing in such funds:

• Investors with high risk tolerance: If you can withstand market fluctuations in the pursuit of better long-term return potential such funds may suit you.
• Investors with a long-term investment horizon: These funds are more suitable for goals set several years away, allowing time for recovery and growth.
• Investors seeking capital appreciation potential in the long term: If optimising return potential is your goal and you understand the risks, these funds may work for you.
• Investors with a diversified portfolio: High-risk funds should be part of a broader portfolio with lower-risk options to balance out the overall risk.
• Investors who understand the risks: You need to fully grasp the potential for loss before investing.

Benefits of investing in high risk and high return potential mutual funds

Here are some of the benefits of such funds:

• Potential for relatively better returns: These funds offer the potential for significant capital appreciation over time compared to traditional investments.
• Inflation-beating return potential: Inflation erodes purchasing power of money over time, but high-risk, high-return potential funds can generate potential returns that surpass inflation.
• Wealth creation potential: For long-term goals like retirement, such funds can be a potential wealth-building tool.

What are the returns on the high-risk mutual funds and how are they calculated?

The potential returns on any fund depend upon market conditions, portfolio composition and investment strategy. You can check returns of multiple time horizons (1 year, 3 years, 5 years etc) to get an idea of a fund category’s return potential. However, actual returns will depend upon market movements during the investment tenure and past performance may or may not be sustained in the future.

How returns are calculated:

Mutual fund returns are calculated using different methods, depending on the type of return being measured. Here are some ways:

1. Absolute Returns

• Used for periods less than a year.
• Formula: Current NAV – Initial NAV/100

2. CAGR (Compound Annual Growth Rate)

• Measures the annualized return over multiple years, factoring in compounding.
• More accurate for long-term performance as it factors in the role of time.

3. XIRR (Extended Internal Rate of Return)

• Used when investments are made at different times (SIP mode).
• Consider the timing of cash flows, making it more precise than CAGR.

4. Rolling returns

• Average annualised returns over multiple overlapping periods.
• Helps assess consistency over time.

5. Trailing returns

• Calculates returns from the latest NAV over fixed periods (1 year, 3 years, etc.).
• Easy for quick comparisons.

FAQs

How do high-risk mutual funds differ from other types of mutual funds?

High-risk mutual funds invest in assets with higher potential returns but also higher risks, such as stocks of small companies or volatile markets. Other mutual funds may invest in relatively stable assets, offering lower returns with lower risks.

What are the potential benefits of investing in high-risk mutual funds?

The main benefit of high-risk mutual funds is the potential for higher returns compared to low-risk funds. They can significantly grow your investment if the underlying assets perform well.

What are the typical risks associated with high-risk mutual funds?

The main risks include higher volatility, the potential for significant losses, and the chance that the underlying assets may not perform as expected. These funds can fluctuate greatly in value.

How can I determine if high-risk mutual funds are suitable for my investment goals?

Consider your financial goals, risk tolerance, and investment horizon. If you are willing to take on higher risk for the probability of higher returns and can invest for the long term, high-risk mutual funds might be suitable for you.

What is the lock-in period for high-risk mutual funds?

Most equity or equity-oriented mutual funds, do not have a mandatory lock-in period, except for Equity-Linked Savings Schemes (ELSS), which has a three-year lock-in.

When should I invest in high-risk, high-return potential mutual funds?

Investing in such funds can be suitable when you have a long-term horizon, a high-risk tolerance, and the ability to withstand market volatility. It is advisable to invest systematically and align investments with financial goals to manage risk effectively.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.