Risk and Return

Understand risk and return in mutual fund investing. Mahindra Manulife investor education.

RISK AND RETURN

UNDERSTANDING

Risk vs Reward in Mutual Funds

The "Reward" Side of the Coin

Why This Matters For You

Types of Risks in Mutual Funds

The Risk-Reward Trade Off

Finding Your Balance

What is my goal?

What is my time horizon?

FREQUENTLY ASKED QUESTIONS

Capital Appreciation

This is the most straightforward reward. An increase of stocks or bonds present in the mutual fund in price will increase the Net Asset Value (NAV) of the fund. Simply put, your investment turns out to be worth a little more than it was originally bought for.

Dividends and Interest

A great number of mutual funds buy shares in companies that pay a portion of their income as dividends to their shareholders. Funds for bond investment will earn interest from their issuers. This income is collected by the fund and may be paid out to you as an investor, hence providing a stream of regular returns.

Market Risks

This refers to the risk wherein an entire market falls, impacting every single fund at one level or the other. Specific situations like a recession, the change in interest rates, political upheavals, and so influencing the economy at large, can

Concentration Risk (or Sector Risk)

Credit Risk (for Debt Funds)

It is a risk that a bond issuer fails to pay interest at the agreed time or redeem the principal on a due date. Should there be an underlying default of the bond issuer, the value of the bonds and thus the funds absorbing them can drop significantly. Fund managers would conduct due diligence in financing a bond issuer to mitigate this risk.

Interest Rate Risk (for Debt Funds)

These risks also affect bond investments. If overall interest rates rise, newly issued bonds carry a safer return, thus impacting the value of all existing bonds with fixed lower rates relative to these new issues. Consequently, the market price of those older bonds with lower yields will drop.

Liquidity Risks

Inflation Risks

Your investment returns may not always keep up with rising prices. Even if your fund shows positive growth, your actual purchasing power can shrink when inflation runs higher than your returns. Debt funds and low-risk investments are more prone to this risk over long periods.

Funds that invest in highly reliable instruments like government securities are generally considered lower risk. They offer modest and more predictable returns.

In the middle, there are hybrid/balanced funds mixing stock and bond securities. In general, these aim to find a balance between growth and stock downside: that is, growth from equities and stability from debt. Hence, they find themselves in the zone for investors who want a middle path between aggressive growth and capital preservation.

Funds under this category offer the highest wealth creation potential but also a high level of volatility. Hence, they are suitable only for the long-term investor who possesses a high-risk tolerance and is not distressed to engage in panic selling when sharp market corrections occur.

What is the potential reward an investor might see from a mutual fund?

A potential reward can come from capital appreciation, which is when the fund\

Does the risk-reward trade-off mean that higher returns are guaranteed with high-risk funds?

No, it does not guarantee higher returns. The trade-off simply means that funds with the potential for higher rewards also carry a higher level of risk, including the risk of losing your initial investment.