Raising risk in your mutual fund investments

Arnav PandyaThe common thought that comes to most people when one talks about a mutual fund investment is that of reducing the risk that they would normally face. At the same time there are specific choices of mutual fund schemes which actually allow the investors to do the actual opposite. So for those investors who actually want to take a higher amount of risk in the search for higher returns there are different options available. This can be a boon for many investors but it can also lead to a situation wherein unsuspecting investors have put their money into such funds without correctly knowing the situation. Here is a look at some of the funds that investors can actually look at for taking a higher risk.Credit opportunities fundThe normal expectation from a debt fund is that this will seek to minimise the risk that is present for its investors and provide a steady return over a period of time. The best way in which a fund can achieve this is by selecting good quality debt holdings in its portfolio. This would mean those holdings that have a high credit rating. The downside to this is that the rate of return here will be relatively lower than other instruments where the credit rating is lower. In order to boost returns there are separate funds that are called credit opportunities fund where the mandate for the fund manager is to invest in slightly lower quality instruments to boost returns. Here the companies where the investment is made have a lower credit rating and this also means that the risk here is higher in terms of the chances of a default that might take place. The investor by deciding to invest in this fund is taking a higher amount of risk in the search for higher returns but this is a deliberate strategy that is being undertaken.Sector fundsIn the equity space there are sector funds where the investment of the fund is concentrated in stocks in a particular sector only. This has two major implications where the first is that the portfolio will be limited to a small area and if these stocks do not rise with an overall rise in the markets or these stocks are doing badly then the performance of the fund will diverge from the general trend seen in the market. The other implication is that there could be a very high percentage of exposure to just a few holdings and this will magnify the risk. Investors who select these funds should have a clear idea that they are going towards an area where their risk is going to be very high and if they get it right the returns could also turn out to be higher. Balanced fundsThere are many investors who might think that they would want to reduce risk by going in for a balanced exposure but this does not always turn out to be correct. The balanced funds category is heavily tilted towards equity due to the manner in which these funds are structured as around 70 per cent of the portfolio of these funds is into equities while the remaining is in debt. This changes the entire nature of the fund and investors who want more of an equity exposure should be the ones choosing this fund in their portfolio. This is not meant for investors who actually want to reduce risk by taking a balanced exposure but rather for those who actually want to take a higher risk which is similar to what is seen in equity oriented funds.