Ways to mitigate mutual funds risks

When it comes to investing, risk and profit are two sides of the same coin. The conventional wisdom holds that to generate more significant returns, one must take on greater risk. Unfortunately, the converse is not true — taking a large risk does not always result in a high return. While taking a large risk is not necessarily bad, it is essential to apply strategies that help limit or mitigate investment risk.

Create a portfolio that is compatible with your risk tolerance

One of the most effective strategies to mitigate the risks connected with mutual funds is to invest in a profile that matches the investor’s risk tolerance. Before selecting a mutual fund scheme, one’s age, financial situation, risk tolerance, and financial goals must be considered. Individuals with low-risk tolerance and a long-term financial objective, for example, may find a balanced portfolio with a profitable mix of debt and equity ideal.

Invest via strategic investment plan

Investors will be able to significantly distribute risk using this investment option. Additionally, investors can successfully cut their investment costs using features such as rupee cost averaging and the power of compounding.

Invest via systematic transfer plan

Additionally, this investment strategy helps spread the risk associated with mutual fund investments over time and lowers the average investment cost. Collectively, it contributes to mitigating the adverse effects of entering an inflated market. It enables investors to switch between funds successfully enables them to consolidate gains and reduce associated risks.

Diversify your holdings

Investments should be spread throughout asset classes and sectors, such as debt, cash equivalents, and equities, to successfully balance the portfolio’s risk-reward ratio and related market risks. Investors can diversify their portfolios appropriately by considering their risk tolerance, time horizon, and financial goals.

For example, investors should place their money in debt schemes for capital protection and guaranteed returns when pursuing short-term aims. Alternatively, for long-term objectives, investors may prefer equity mutual funds due to their favourable risk-reward ratio.