Do you have the stomach to invest in these funds?

Mutual funds are the favoured investment instrument of investors. There are several types of mutual funds such as equity mutual funds, debt mutual funds, hybrid mutual funds etc. There is also a sectoral mutual fund which is considered the riskiest among all. So what are these sectoral funds? Read on to know about them.

These funds invest in midcap, smallcap and largecap stocks of a sector. When market is going up, sectoral fund gives a good amount of return.

Sectoral focused fund is the riskiest equity mutual fund. The reason for that is that there is no diversification in it. Investment is confined to just one sector. During unfavourable conditions, if a sector gets badly hit then its stocks will also fall sharply. Such investment is only for seasoned investor who can gauge the direction of a sector.

But before investing in such a fund, consider your risk appetite.
For example, small cap and mid cap stocks are riskier than large cap. So, if an investor is looking for limited risk then he can invest in large cap funds. His return will be lower but much safer. Hence this fund is good for long term investors.

Huge volatility

Similarly, there is a high risk in small cap funds and there is huge volatility. During uncertainty in the market, volatility intensifies in small cap shares. On the bright side. If market is moving up, then these shares give very high return.

So investors need to be specific about their goal, risk appetite and opt for mutual fund accordingly. Mutual funds invest in all kinds of assets like equity, debt, corporate bonds, government securities, shares of different sectors etc.

Value of these funds vary dynamically due to several factors.

Due to changes in the market, NAV of a fund declines and due to this investors bear loss.

Hence it is important to know about your risk profile and then invest in a fund that matches it.
But how does one know about the risk factors of a mutual funds. The
website of a mutual fund also shows a riskometer which depicts the risk in the form of a graph.

Risk category

In the mutual fund riskometer, there are five categories of risk. There is a different colour for each category.

On 10th  of every month. Mutual fund houses have to publish a portfolio and riskometer of schemes.

If you are investing in a mutual fund, then you need to keep in mind few things. You have to understand about nature and target of a fund. Also, look at its riskometer to asses the risk associated in a fund. Even after all this, if you are unable to assess your risk profile. Then consult a financial advisor. He can understand your financial condition in a better way and will suggest a scheme accordingly.