It’s known that equity funds are risky. But within equity funds, there are some that come with less risk, while others that come with high risk.

We trust our fund managers to pick the right stocks and sectors at the right time, but there are times when they can also go wrong. Therefore, actively-managed schemes also carry fund manager’s risk. 

And that is why index funds and exchange-traded funds (ETFs) are the least risky of all equity funds. They mirror the benchmark index’s performance by investing in the same stocks and in the same proportion as they lie in the index. 

Within actively-managed funds, those that invest largely in large-sized companies are the least risky. Since these funds track the 100 largest companies by market capitalisation, these funds move more or less in line with broad market indices. But they do come with a fair share of volatility. Returns are never guaranteed, and if equity markets go down in a particular year, so do these. But the fall is typically lesser than other, more risky equity fund options. So far this year, large-cap funds have fallen by 14%, but small- and mid-cap funds have fallen by 21%. Small- and mid-cap funds invest in companies that aren’t tracked by as many analysts and fund managers as large-cap companies are and hence schemes investing in these companies can give you far higher returns in rising markets, but can also fall sharply in falling markets. 

The riskiest of all mutual fund schemes are thematic and sector funds. A thematic fund invests in a clutch of sectors bound by a common theme, such as infrastructure, bank and financials. 

A sector fund is narrower. It invests in just one- or,  two sectors. These funds are opportunistic as they aim to maximise their returns when their chosen sectors are doing well. Hence, to make the most of them, investors need to understand when to invest in them and when to exit. 

Remember: risk is there in every mutual fund scheme. But risk is not bad. If you want a chance to earn higher returns over a long period of time, you need to take a bit of risk. But there are ways to minimise risks even if you choose equity funds. But if you think you’ll need money within five years, avoid equity funds. 

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