Best High-Risk Mutual Funds

You have many mutual funds categorised under high-risk mutual funds. You may invest in high-risk mutual funds if you are an aggressive investor with a time horizon of above seven years. You would have to bear high volatility with your investments over the short to the medium term.


Introduction to Moderate-Risk Mutual Funds

You may consider putting money in moderate-risk mutual funds if you have an investment horizon of one to five years. Invest in moderate-risk mutual funds if you have moderate risk tolerance.
You may opt for dynamic bond funds which is a type of debt fund. It alters allocation between short-term and long-term bonds, depending on interest rate movements to maximise your return. You could invest in short duration funds if you have a moderate risk appetite and investment horizon of one to three years. It offers you a stable return at moderate risk.
Dynamic asset allocation funds invest in a mix of stocks and fixed income instruments. The fund manager changes the asset allocation depending on market movements to offer optimum return at moderate risk.


Who should invest in high-risk mutual funds?

You may invest in high-risk mutual funds if you know stock markets and the time to select the right investment. You will have to stay invested for the long-term if you seek a high return from your investments. However, high-risk mutual funds are hazardous, and you may invest only if you have a high-risk tolerance.
You may invest in high-risk mutual funds to attain your long-term financial goals such as retirement planning or buying a house. You could invest in mid-cap or small-cap stocks if you seek an inflation-beating return in the long-run.
You may invest in sector funds if you have a strong understanding of the stock markets. It puts your money in shares of companies in one sector such as pharma, oil and gas, infrastructure and so on. It could offer a higher return as compared to many equity funds. However, you may consider investing in sector funds only if you have a high-risk appetite.
You may consider investing in credit risk funds only if you can invest in lower-rated corporate bonds. It offers a higher return than debt funds that invest in bonds of a higher credit rating. However, it invests most of the fund’s assets in corporate bonds with a rating below AA+. You may invest in credit risk funds if you have an investment horizon of three to five years and can accept a higher risk than low-risk funds.


Taxability of high-risk mutual funds

You could invest in equity funds such as mid-cap funds, small-cap funds, sector funds and thematic funds if you are willing to bear a higher risk for a greater return. It invests most of the assets in stocks and is treated as equity funds for taxation purposes.
You would find the short-term capital gains (after a holding period below one year) taxed at 15% with applicable cess. The long-term capital gains or LTCG (after a holding period of one year or more) are taxed at 10%. However, long-term capital gains up to Rs one lakh in a financial year are tax-free.
You would find credit-risk funds taxed in a similar way as debt funds. The short-term capital gains or STCG (after a holding period under three years) are taxed according to your income tax bracket. The long-term capital gains or LTCG (after a holding period of three years or more) are taxed at 20% with the indexation benefit.


Risks associated with high-risk mutual funds

You would find high-risk mutual funds affected by equity or stock market risk. It is subject to the volatility of the stock market. Sector funds put money in stocks of one sector. It is riskier than diversified equity funds which spread your investment across different sectors and various companies.
Credit risk funds are affected by credit risk. It puts money in corporate bonds of a lower rating. It increases the risk of a default on both the principal and the interest payments. You may find the credit rating of many corporate bonds downgraded, which increases the risk of putting money in credit risk funds.


Things to consider before investing in high-risk mutual funds

  • Investment Objectives: You may invest in high-risk mutual funds to achieve your long-term financial goals. It helps you attain financial goals, such as buying a house or retirement planning.
  • Time Horizon: You may put money in high-risk mutual funds if you have an investment horizon of seven years.
  • Risk profile: High-risk mutual funds are affected by market risk and credit risk. You would find equity funds such as thematic and sector funds impacted by volatility in the stock market. Credit risk funds are affected by credit risk as they put money in corporate bonds of a lower rating.
  • Track Record: You could diversify your portfolio with high-risk mutual funds. You may consider checking the high-risk fund’s expense ratio and the mutual fund manager’s investment style. You must select the high-risk mutual fund after checking the track record of the AMC and performance of the mutual fund against a benchmark index.
  • Check the fund fact sheet: You could consider studying the high-risk fund portfolio from the mutual fund fact sheet. Check the credit rating of the bonds in the portfolio of the credit risk fund.

Advantages of investing in high-risk mutual funds

The following are benefits of investing in high-risk mutual funds:

  • It could offer a higher return as compared to low and medium-risk funds.
  • It helps you achieve long-term financial goals as it could generate inflation-beating returns over some time.
  • You may put money in medium and small businesses through mid-cap and small-cap funds. It may have a higher risk. However, these companies may become top businesses in the future and offer you a higher return.
  • High-risk mutual funds may offer tax-efficient returns compared to bank fixed deposits if you fall in the higher income tax slabs.