There are various types of mutual funds available with various risk levels. These include equity funds like large cap, multi-cap, balanced fund also known as hybrid funds, debt funds like liquid funds etc. Mutual fund types that may fall into the high-risk mutual fund category include small cap, mid cap, etc.
While these mutual funds carry risks, they come with high return potential. As a retail investor, it is crucial to know which top high-risk mutual funds may be your best bet per your investment profile to generate higher returns.
To choose an appropriate high-risk, high-return mutual fund, check its previous performance to ensure it is still performing according to your risk appetite and financial goal requirement.
Features of high-risk mutual funds
High-risk mutual funds are volatile but can deliver high returns. Thus, they are best suited for you if you are willing to take an increased risk. Opting for the best high-risk mutual funds may allow you to yield market and inflating beating returns.
If you have opted for the dividend option instead of growth, you may even get a higher dividend on your mutual fund units. You can use such high-risk mutual funds to gain the benefit of portfolio diversification. Several high-risk funds provide sectoral exposure permitting you to put your funds in sectors expecting higher growth over time. Via such funds, you can even invest in upcoming sectors or new markets like e-commerce or renewable energy.
Thus, high-risk funds allow you to invest in organizations and companies projecting high growth. However, it also means that as such corporations are less steady than big corporations and are vulnerable to market fluctuation, your final returns could be negatively impacted if the corporation performs poorly.
Therefore, you can invest in such funds if you hold a high-risk appetite. If you are risk-averse and remain concerned about protecting your initial investment, you must not invest in such high-risk mutual funds.
Taxation on high-risk funds
As high-risk funds invest in equities, capital gains are taxed according to capital gain tax rates. If the holdings in high-risk equity funds are sold within one year, a 15% STCG (short-term capital gain) tax is levied. If the investment tenure is over a year, the applied LTCG (long-term capital gain) tax rate is 10% on gains of more than Rs 1 lakh.
Who should invest in high-risk mutual funds?
High-risk mutual funds are best for you if you can face risk and have the goal of benefiting from higher growth potential. If you are a long-term investor with a slightly higher risk potential and previous experience in handling market volatility, you can also opt for high-risk funds.
High-risk mutual funds are a perfect choice if you can absorb the short-term volatility and patiently remain invested over a longer time horizon of five years and above.
Just like any investment option, high-risk funds come with a set of benefits and drawbacks. Such funds are prudent if you have market experience and want to stay invested in the market for long. Also, to select the best high-risk mutual fund per your preference, you must conduct in-depth market research.
Once you invest, you must periodically check the fund’s performance with its peer funds and benchmark indices. If your investment underperforms for three years, consider redeeming your investment to invest in better-performing, high-risk, high-return mutual funds.