Moderate Risk Mutual Funds

Moderate risk mutual funds provide a balanced investment strategy by blending equities for capital appreciation and fixed-income securities for stability. They aim to deliver steady growth while managing volatility, making them ideal for investors seeking a mix of risk and reward.
EXPLORE FUNDS
What are Moderate Risk Mutual Funds
EXPLORE FUNDS
4 mins
11-Feburary-2025

Moderate-risk mutual funds take a balanced approach, aiming for both growth and income. They typically invest in a mix of equities for capital appreciation and fixed-income securities for stable returns. This hybrid approach aims to generate returns that outperform inflation over a medium-term investment horizon (typically 3-5 years). Compared to other options, moderate-risk funds offer a middle ground in terms of risk. They are less volatile than pure equity funds, which focus solely on stocks, but carry slightly more risk than low-risk debt funds.

Investing in mutual funds is a popular way to grow wealth in India. However, with so many options available, it can be challenging to choose the right one. In this article, we will explore moderate-risk mutual funds, which are a popular choice for investors seeking a balance between risk and reward.

What are moderate-risk mutual funds?

Moderate-risk mutual funds are investment funds that invest in a mix of equity and debt instruments. They are designed to generate inflation-beating returns over the medium term. These funds are less risky than pure equity funds and slightly more risky than pure debt funds.

These funds mainly refer to MIP funds, hybrid funds, dynamic bond funds, short-duration funds, and arbitrage funds.

These funds are suitable for investors who have a moderate risk tolerance and an investment horizon of one to five years. They can be a good choice for investors looking to achieve medium-term financial goals while being protected from the stock market’s volatility.

Features of moderate-risk mutual funds

Moderate-risk mutual funds in India have the following features:

  1. Asset Allocation: These funds adopt a diversified asset allocation strategy, investing in both equity and debt schemes, thereby striking a balance between risk and reward. The blend of equity and debt components contributes to a favourable risk-reward ratio, ensuring that potential losses from negative returns are moderate to low.
  2. Variety: There are various types of moderate-risk mutual funds, including dynamic bond funds, hybrid funds, short-duration funds, and arbitrage funds.
  3. Taxability: The tax treatment of these funds depends on their composition. The mutual funds schemes are treated as equity funds for taxation purposes if the fund’s equity assets are at least 65% on a median basis. However, if the fund’s equity assets are less than 65%, it is treated as a debt fund.

Remember that investing in mutual funds always carries some level of risk, and it’s important to thoroughly research and consider your financial goals before investing.

How do moderate risk mutual funds work?

Moderate-risk mutual funds, often called balanced funds, aim to achieve a middle ground between growth potential and risk management. They invest in a diversified mix of assets, including stocks, bonds, and cash equivalents, to provide steady returns while limiting exposure to market volatility.

Fund managers adjust the asset allocation based on market conditions and the fund’s objectives. During periods of economic stability, they may increase equity investments to maximise growth. Conversely, in times of market uncertainty, they may shift towards bonds or cash to minimise risk.

These funds are popular among investors seeking more stability than pure equity funds while still benefiting from growth opportunities. However, they are not risk-free, and returns may fluctuate. Before investing, it’s important to evaluate your risk tolerance and financial goals.

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Advantages of moderate-risk mutual funds

Balanced Growth and Income

Moderate-risk mutual funds provide a well-rounded approach by combining equities for capital appreciation and fixed-income securities for steady returns. This balance allows investors to participate in market growth while receiving regular income, making it an appealing choice for those seeking both stability and potential gains.

Diversification for Risk Reduction

By investing across multiple asset classes, sectors, and geographies, moderate-risk funds help spread risk. If one investment underperforms, gains in other areas can offset the impact. This diversification helps stabilize returns and minimizes the risk of significant losses from any single asset.

Lower Volatility Compared to Equity Funds

Although these funds include stocks, their allocation to bonds and other fixed-income instruments helps cushion market fluctuations. This results in a more stable investment experience, reducing the sharp ups and downs often seen in pure equity funds.

Higher Return Potential Than Low-Risk Funds

Moderate-risk funds offer better growth potential than low-risk funds, which primarily focus on bonds or money market instruments. By incorporating equities, these funds have the ability to generate higher long-term returns, making them suitable for investors willing to accept moderate risk in pursuit of greater rewards.

Expert Fund Management

These funds are overseen by experienced professionals who continuously analyse market trends and adjust asset allocations to enhance performance. This professional oversight ensures that investment decisions are informed and strategic, benefiting investors who may not have the time or expertise to manage their portfolios actively.

Flexibility to Adapt to Market Conditions

Moderate-risk mutual funds offer adaptability, as fund managers can shift asset allocations based on market trends. This flexibility helps manage risks while capitalising on growth opportunities, ensuring the fund remains aligned with its investment goals through various market cycles.

Disadvantages of moderate-risk mutual funds

Risk of Losses

While designed to balance risk and return, moderate-risk mutual funds are still exposed to potential losses. The inclusion of equities makes them vulnerable to market fluctuations, which can lead to negative returns, particularly during economic downturns. Unlike low-risk funds, these investments are not fully insulated from volatility, which may impact their overall value.

Unstable Income Flow

Compared to low-risk funds that primarily invest in fixed-income securities, moderate-risk funds may offer a less predictable income stream. Equity dividends depend on company performance and broader economic conditions, making them inconsistent. Investors relying on steady returns might find these fluctuations challenging to manage.

Higher Management Costs

Moderate-risk mutual funds often carry higher expense ratios due to the active management required to balance different asset classes. These costs can eat into potential gains, particularly in periods of average or below-expectation performance. Investors should be mindful of how fees impact overall returns.

Inflationary Impact

Although moderate-risk funds aim for higher growth than conservative investments, they may not always outpace inflation. If returns fail to keep up with rising costs, the real value of the investment diminishes over time, posing a concern for investors focused on wealth preservation.

Sensitivity to Interest Rates

The bond component of these funds is directly affected by interest rate movements. When rates rise, bond prices typically fall, which can negatively impact overall fund performance. This interest rate risk may offset potential gains from the equity portion of the portfolio, leading to fluctuating returns.

Complexity and Monitoring Requirements

Due to their diversified nature, moderate-risk mutual funds require a deeper understanding of asset allocation, market trends, and risk exposure. This complexity demands more due diligence and ongoing monitoring, which may not be suitable for investors who prefer a straightforward, hands-off approach.

Who should invest in moderate-risk mutual funds?

These mutual funds for the following types of investors:

  1. Investors with moderate risk tolerance: These funds are ideal for investors who are willing to accept periods of moderate volatility in the market in exchange for returns that may beat inflation.
  2. Investors with medium-term financial goals: If you have a financial goal that is one to five years away, moderate risk mutual funds could be a good fit.
  3. Investors seeking diversification: These funds can help diversify your portfolio and protect it from the volatility of the stock market.
  4. First-time investors in debt funds: Short-duration funds, which are a type of moderate risk mutual fund, can be suitable for first-time investors in debt funds.

Taxability of moderate risk Mutual Funds

The tax treatment of moderate-risk mutual funds depends on the holding period and the fund type.

Long-Term Capital Gains (LTCG) Tax

  • For debt-oriented funds such as short-duration funds and dynamic bond funds, LTCG tax applies if the investment is held for more than three years. The tax rate is 20% with indexation benefits.
  • Equity-oriented funds, on the other hand, attract an LTCG tax of 10% if held for more than one year. However, gains up to Rs. 1 lakh per financial year are exempt from taxation.

Short-Term Capital Gains (STCG) Tax

  • If debt-oriented funds are redeemed within three years, the gains are taxed as per the investor's income tax slab rate.
  • Equity funds held for less than one year incur an STCG tax of 15%, with no exemptions.

Tax on Dividends

Dividends received from moderate-risk mutual funds are added to the investor’s taxable income and taxed according to their respective income tax slab. Additionally, if the dividend payout exceeds Rs. 5,000 in a financial year, a 10% TDS (Tax Deducted at Source) is applicable.

Points to consider before investing in Moderate Risk Mutual Funds

Define Your Investment Goals

Before investing, it's important to establish clear financial objectives. Determine whether you aim for a mix of capital appreciation and income or if you're seeking portfolio diversification with a moderate level of risk. Ensure that these funds align with your long-term financial aspirations and that you are prepared for potential fluctuations in returns.

Evaluate Your Risk Appetite

Moderate-risk mutual funds typically combine equities and fixed-income securities, leading to moderate market volatility. Assess whether you are comfortable with periodic ups and downs in your investment value and the possibility of short-term losses. Understanding your risk tolerance helps you decide if these funds suit your investment strategy.

Consider Your Investment Horizon

Timeframe plays a crucial role in investment success. Moderate-risk mutual funds are best suited for those with a medium to long-term outlook, usually between three to ten years. A longer holding period allows for market corrections and enhances the benefits of compounding, helping you achieve better returns over time.

Analyse Asset Allocation

The composition of a mutual fund impacts its risk and return potential. Review the proportion of equities and fixed-income instruments within the fund and ensure it matches your investment preferences. A well-balanced allocation provides growth opportunities while maintaining stability. Choose funds that align with your financial goals and risk tolerance.

Understand Costs and Fees

Moderate-risk mutual funds often involve higher management fees due to active portfolio management. Check the expense ratio and compare it with similar funds to assess cost efficiency. Understanding fee structures helps you select funds that offer optimal returns relative to expenses.

Assess Past Performance

Although historical performance does not guarantee future returns, it offers insights into how a fund has navigated different market conditions. Compare the fund’s track record with relevant benchmarks and peer funds to determine its consistency in delivering returns and managing risks effectively.

Conclusion

To sum up, moderate-risk mutual funds aims to offer a balance between risk and reward, making them an ideal choice for investors seeking stable returns with moderate risk. These funds invest in a mix of equity and debt instruments, which helps to diversify the portfolio and reduce risk. However, these funds still carry market risks, so investors should carefully consider their investment objectives before investing.

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Frequently asked questions

How to invest in medium risk mutual funds?

You can invest in medium-risk mutual funds via a Systematic Investment Plan (SIP) or a lump sum method. In SIP, you need to pay a specified amount at regular intervals which can be monthly, half-yearly, or quarterly. The lump-sum method involves investing a large amount at once.

How do moderate-risk mutual funds differ from low-risk and high-risk options?

Mutual funds in India can be broadly looked at as low-risk, moderate-risk, and high-risk based on the level of risk associated with the investment. Here’s how they differ:

Risk level

Description

Investment type

Suitable for

Low-risk mutual funds

These funds aim to guard against the possibility of any loss, ensuring that none of the possible losses are catastrophic.

They have a lesser stake by definition—either in terms of the money invested or the value of the investment to the holdings.

Investors seeking security and optimal gains in the short term, such as beginners or senior citizens.

Moderate-risk mutual funds

These funds expose investors’ capital to average levels of risk. They invest in varied securities to maintain reasonable market risks against inflation-adjusted returns.

These funds mainly refer to MIP funds, hybrid funds, dynamic bond funds, short-duration funds, and arbitrage funds.

Investors with a moderate risk tolerance and an investment horizon of one to five years.

high-risk mutual funds

A high-risk investment is one in which there is a high probability of capital loss or underperformance—or a comparatively high probability of a catastrophic loss.

These are suitable for seasoned investors with a higher appetite for risk who can afford to risk a little volatility with funds invested primarily in equities.

Seasoned investors with a higher appetite for risk.

Remember, the risk associated with mutual funds is not just about the potential for loss, but also about underperformance compared to expectations. Therefore, choosing between low-risk, moderate-risk, and high-risk mutual funds depends on your individual risk tolerance and investment goals. Always consider consulting with a financial advisor before making investment decisions.

What factors should investors consider when selecting a moderate-risk mutual fund for their portfolio?

When selecting a medium-risk mutual fund for your portfolio, consider the following factors:

  • Investment objectives: Align the mutual fund with your medium-term financial goals.
  • Time horizon: Moderate-risk mutual funds are suitable for an investment horizon of three to five years.
  • Risk profile: Understand that moderate-risk mutual funds are impacted by credit risk and interest-rate risk.
  • Track record: Check the past performance of the fund against a benchmark index.
  • Expense ratio: Consider the fund’s expense ratio as it can impact the net returns.
  • Fund manager’s investment style: Understand the investment style of the fund manager to see if it is too aggressive or vice versa, for your needs.
  • Taxation: Be aware of the tax implications. For instance, dynamic bond funds and short duration funds are taxed like debt funds.
What is considered a moderate-risk investment?

An investment considered moderate risk offers the potential for growth alongside some protection from market swings. It might include a mix of stocks, bonds, and sometimes even alternative assets.

What does a moderate-risk portfolio look like?

The exact makeup depends on your risk tolerance and goals. Typically, a moderate portfolio balances stocks (growth potential) with bonds (stability) in a percentage split.

Is moderate risk good?

Moderate-risk investments may not provide the same level of security as low-risk options, but they offer greater potential for returns. The balanced approach between risk and reward makes them appealing to many investors, even if they are not the primary focus of a portfolio.

What are examples of moderate risk taking?

A common example of moderate risk-taking is accepting a project without
receiving an upfront payment. Many businesses take this approach to
build trust and attract new clients while managing potential risks.

Who is taking moderate risk?

Investors with a moderate risk tolerance who prioritise some growth alongside capital preservation might choose moderate-risk investments. This could include individuals saving for retirement or a future down payment.

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Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

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Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.