Best Moderate-Risk Mutual Funds

Who should invest in moderate-risk mutual funds?

You may consider investing in moderate-risk mutual funds such as dynamic bond funds if you have a moderate risk tolerance and time horizon of three to five years. The fund manager uses interest rate fluctuations to generate a higher return than low-risk funds over some time. You could invest in moderate-risk funds to achieve medium-term financial goals.
You could diversify your portfolio with moderate-risk funds such as dynamic bond funds and short duration funds to stay protected from the stock market’s volatility. You may put money in short duration funds if you have an investment horizon of one to three years.
It invests in debt and money market securities where the duration of the portfolio is between one to three years. You could invest in short duration funds if you seek regular interest income and a higher return than low-risk funds. It is suitable for first-time investors in debt funds. You could invest in dynamic asset allocation funds if you have an investment horizon of above three years. It offers you a risk-adjusted return over a longer time horizon.

Taxability of moderate-risk mutual funds

You could invest in dynamic asset allocation funds, dynamic bond funds or short-duration funds if you have a moderate risk appetite. Dynamic funds are treated as equity funds for taxation purposes. (If equity and equity-related assets are a minimum of 65%). However, if the fund’s total assets fall below 65%, it is taxed like a debt fund.
The dynamic bond fund and short duration fund are taxed just like a debt fund. The short-term capital gains (after a holding period under three years) are taxed depending on your income tax slab. The long-term capital gains (after a holding period of three years or more) are taxed at 20% with the benefit of indexation.
The dividends you earn from moderate-risk funds are added to your taxable income. You have to pay taxes depending on your income tax bracket.

Risks associated with moderate-risk mutual funds

You have short duration funds affected by interest rate risk. It puts money in debt instruments where the duration of the portfolio is between one to three years. It is vulnerable to interest rate fluctuations over some time.
Dynamic bond funds are affected by interest rate risk. It invests in bonds across maturities and is vulnerable to interest rate movements. Dynamic bond funds are also affected by credit risk as they may invest in bonds of a lower credit rating. Dynamic asset allocation funds invest in stocks and are affected by volatility in the stock market.

Things to consider before investing in moderate-risk funds

• Investment Objectives: You may invest in moderate-risk mutual funds to achieve your medium-term financial goals. It is ideal for achieving medium-term goals, such as buying a car.
• Time Horizon: You may put money in moderate-risk mutual funds if you have an investment horizon of three to five years.
• Risk Profile: Moderate-risk mutual funds are impacted by credit risk and interest-rate risk. You may find some moderate-risk mutual funds affected by the volatility of the stock market.
• Track Record: You could diversify your portfolio with moderate-risk funds. You may consider checking the moderate-risk mutual fund’s expense ratio and the fund manager’s investment style. Select the moderate-risk fund only after checking the AMC track record and the scheme performance against a benchmark index.
• Check the fund fact sheet: You could consider studying the moderate-risk fund portfolio from the mutual fund fact sheet. Check the credit rating and the duration of the bonds in the portfolio of the moderate-risk mutual fund.

Advantages of investing in moderate-risk mutual funds

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

• It could offer inflation-beating returns over some time.
• It is a tax-efficient investment compared to bank fixed deposits if you fall in the higher income tax brackets.
• It helps you achieve your medium-term financial goals.
• It is safer as compared to high-risk investments.