Why proper risk assessment makes all the difference

The quest for financial growth is littered with pitfalls. The emergence of mutual funds as an investment tool brings that into sharp relief once again, especially considering an average investor’s inability to put risk at the centre of their investment strategy. Most still rely on absolute returns as a measure to pick mutual fund investments, when risk-adjusted returns offer a far clearer picture of a fund’s potential.

How investors can revise their approach to mutual fund investments and assess risk accurately formed the crux of a special discussion on ‘Risks Vs. Returns in Mutual Funds – What should be your pick?’ presented by Quantum Mutual Fund and Moneycontrol. Hosted by Kayezad Adajania, the panel featured Chirag Mehta, Senior Fund Manager, Alternative Investments, Quantum Mutual Fund and Dhaval Kapadia, Director – Portfolio Specialist, Morningstar Adviser Pvt. Ltd., laying out clearly ways in which risk can alter an investment’s ability to fulfil its goal.

Steering Towards Safety

Risk assessment is normally the first step in investment. With regards to picking the right mutual fund, Chirag Mehta recommends carefully researching a fund’s past risk strategies. A key indicator is the portfolio turnover ratio, which indicates how quickly securities are bought and sold by a fund. A high turnover ratio points to riskier bets. “You have to invest in something that looks more consistent in nature, than in something that’s frequently changing”, was Chirag Mehta’s succinct advice to all investors.

Dhaval Kapadia, on the other hand, didn’t immediately condemn a short term vision, provided it matches the fund manager’s style and stated objectives. A mismatch in thought and action spells trouble. He also endorsed calendar returns as a more accurate representation of a mutual fund’s performance than trailing returns alone, since it reveals how a fund copes with changing market cycles.

Know Your Risk

Though risk might be a common factor in investment across different asset classes, they vary in their scope and immediacy. “There are different types of risks, be it in the valuation, be it the opportunity risk, or the risk from volatility”, said Chirag Mehta, while talking about the fundamentals of risk assessment. Even the more stable alternatives, like debt instruments, face interest risks and credit risks.

The solution, according to the panel of experts, is to understand the risk factors and pick investments that match one’s risk appetite. For Chirag Mehta, that’s a cue to diversify. He called on investors to “grab all the opportunities after doing thorough research on the investment decision.” Dhaval Kapadia also emphasized the need to have a clear idea about the duration of an investment. “The plans you’re making will be dependent on your time horizon.”

The discussion provided a lot of food for thought for investors to ponder. It also demonstrated the depth of analysis and insight that goes into framing a mutual fund investment strategy. But if done right, it can yield a world of riches for funds and their customers.

Watch the full discussion here:

For more information on how you can make your investment journey a success, visit https://www.quantumamc.com/