<p>The standard disclaimer for <a href="https://www.utimf.com/">mutual funds</a> reads, "Mutual Fund investments are subject to market risks, read all scheme related documents carefully." As mutual funds generate returns through the underlying securities in the portfolio, several investment risks come along with mutual fund investments. These may include volatility risk, liquidity risk, interest rate risk, credit risk, etc.</p>
<p>While risks are indeed inherent to <a href="https://www.utimf.com/articles/how-to-invest-in-mutual-funds/">mutual fund investments</a>, investors can plan to align with their respective risk profiles instead of trying to avoid them altogether and only investing in traditional investment products.</p>
<p>Like every other investment product, the <strong>risk-return matrix</strong> for <strong>mutual funds</strong> also reflects that the return expectations must be commensurate with uncertainty. As such, high return expectations may entail higher risk. However, it should be noted that higher returns are not automatically guaranteed if the portfolio carries higher investment risk. As such, the investors must balance the investment portfolio's risk profile by designing a suitable investment portfolio, albeit with appropriate moderation in the mutual fund scheme return expectations. In this way, they can aim for better <strong>risk- adjusted returns</strong> from <strong>mutual funds</strong>.</p>
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<p>Each of the mutual fund categories can help investors finetune their portfolio's risk profile. For example, investors can choose across different <a href="https://www.utimf.com/mutual-fund-products/debt-funds/">debt fund</a> categories based on the targeted interest rate and credit rate risks.</p>
<p>Such risks vary across different categories as per their investment objective, modified duration, credit profile, etc. Similarly, within the overall basket of <a href="https://www.utimf.com/mutual-fund-products/equity-mutual-funds/">equity funds</a>, one can invest in funds across different market capitalisation segments, investment strategies, etc. One can also consider investing in <a href="https://www.utimf.com/mutual-fund-products/hybrid-funds/">hybrid funds</a> to maintain a balance of equity and debt with a single investment product.</p>
<p>The availability of a wide range of <a href="https://www.utimf.com/mutual-fund-schemes/">mutual fund schemes</a> allows investors to balance their risk-reward trade-offs by making suitable investment choices and having a pleasant investment experience towards effortlessly achieving their financial goals.</p>
<p>All such risks primarily refer to the risk of the investors not being able to realise the actual potential of their investments. Similarly, the changes in the macroeconomic condition, like market interest rates, etc. may also cause changes in the valuation of the underlying investment portfolio. Different asset classes and their respective sub-categories of mutual fund schemes may carry different risk- reward trade-off.</p>
<p>The broad spectrum of mutual fund schemes available may broadly be classified into two categories: debt and equity funds. While debt funds invest predominantly in debt securities, equity funds create an investment portfolio primarily consisting of equity shares. As such, such funds broadly carry a similar risk profile as that of the underlying asset class.</p>
<p>Debt funds intent to provide returns, while equities equip the investors with the long-term potential for <a href="https://www.utimf.com/articles/wealth-creation-through-mutual-funds/">w… creation</a>. At the same time, equity markets also tend to be volatile over the short term and thus, not suitable for short term financial goals.</p>
<p>However, investors may further finetune the risk profile by choosing between different mutual fund schemes. For example, within debt funds, investors may choose to invest in money market funds, duration funds, <a href="https://www.utimf.com/mutual-fund-products/debt-funds/uti-gilt-fund/">g… funds</a>, credit opportunities funds, etc. While gilt funds may carry insignificant credit risk with the portfolio comprising the sovereign securities, the typically high duration for such funds may expose the investors to interest rate risk.</p>
<p>Such risk is directly proportional to the Macaulay duration of such funds. In contrast to gilt funds, Credit Opportunities funds aim to capitalise on the prevailing higher credit spreads and, thus, generating higher returns for the investors. However, the underlying investment portfolio also tends to expose the investors to credit risk depending upon the credit quality of the underlying investment portfolio. As such, the investors may choose a suitable debt fund to balance their risk-reward trade- offs.</p>
<p>Similarly, within the overall basket of equity funds, one may invest in funds based on market capitalisation, investing strategy, <a href="https://www.utimf.com/solution-based-plan/uti-elss/">Equity Linked Savings Scheme</a> (ELSS), etc. While an aggressive investor may be comfortable investing in small-cap funds, a conservative investor may be more comfortable investing in large-cap funds, dividend yield funds, etc. Investors may also consider investing in hybrid funds to balance equity and debt with a single investment product.</p>
<p>While the investors may also manage the asset allocation within the investment portfolio by themselves, they may also automate the process by investing in dynamic asset allocation funds. Such funds adjust the equity and debt levels based on their relative valuations. As such, when the equity valuations are inexpensive, the equity exposure is increased. On the other hand, when the valuations are trading higher in equity markets, the equity exposure is reduced by booking profits at higher levels. This allows downside protection to the investment portfolio during subsequent market corrections.</p>
<p>As such, the investors may balance their risk-reward trade-off in their investment journey with optimal asset allocation strategies, whether by investors themselves or through dynamic asset allocation funds</p>
<p><b>Disclaimer:</b></p>
<p>Mutual Fund investments are subject to market risks, read all scheme related documents carefully.</p>