Personal Finance Blog India –

How To Select Low Risk Mutual Fund Scheme –

As far investing in mutual funds is considered , Risk is very much important attribute to be considered.

Market risk comes integral with the mutual funds but investor can surely minimize scheme based investing  risk.Think for following factors before you select any mutual fund scheme:

Type Of Mutual Fund – Few years back number of investors have invested in infrastructure related mutual funds and this sector have remained major underperformer in last 4-5 years.Pure sectoral funds carry high risk as well offer high rewards and its good choice only for aggressive investors & for investors who have sufficient expertise to take call on particular sector…otherwise sectoral funds needs to be avoided and always select a good Equity diversified mutual fund scheme.

Study Annual Returns

Study annual returns of the mutual fund scheme.If there is large variation in the rolling annual returns then it should carry high investing risk.

fluctuations of the mutual fund scheme with respect to benchmark can be measured using different parameters like Variance &  Standard Deviation .

Comparing with benchmark

Consider following two mutual fund scheme:

Scheme A B Benchmark
03 months Reurns 12% 8% 5%
06 months  returns -10% -1% -3%

I will find more risk in scheme A .Though it has outperformed benchmark for first case,slide is much more when returns are in negative.

Beta Coefficient :Beta coefficient is major of volatility of scheme in comparison with the corresponding index.If Beta of scheme is less than 1 then scheme is considered to be less volatile in comparison with the index & vice versa if Beta coefficient is greater than 1. Value of Beta coefficient of scheme can found in KIM provided by mutual funds.

Bottomline :Risk & rewards comes together.Mutual fund is a middle path between direct equity investment & safe investments like fixed deposits.We can not completely eliminate risk in mutual funds but surely consider above factors & make better choice of mutual fund scheme…isn’t it?

Category: Mutual Funds


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