The Value Research Fund Classification can be a good starting point to understand the risk associated with funds…
14-Sep-2012 •Research Desk
Which funds are classified aggressive? What makes them aggressive?
Just the way beauty lies in the eyes of the beholder, risk lies in the minds of the investors. The investment risk in a fund decides if the fund is aggressive or not, and that too differs with each investor. Investors used to guaranteed return instruments will find even a monthly income plan (MIP) from mutual funds with less than 25 per cent equity exposure as aggressive. What one needs to be aware of is the fact that investing in equity mutual funds comes with risks because of the inherent nature of risks coming into play with equity exposure of any kind.
However, the investment risk comes with a return trade-off and investors who seek superior returns can realise high returns depending on the risk that they are willing to take with their investments.
The Value Research Fund Classification is a good starting point to understand the relative stability or the risks associated with mutual fund investing. The classification splits equity funds into sub-categories based on their exposure to stocks across different market capitalisation over a 3-year time frame. For instance, a multi-cap fund, which invests 40 to 60 per cent of its assets in large-cap stocks while the remaining in mid- and small-cap stocks, can be slotted as being aggressive. Similarly, the mid- and small-cap category, in which mid- and small-cap allocation is at least 60 per cent, is also aggressive. Further, within the mid- and small-cap fund category, there are funds that have a higher allocation to small-cap stocks, compared to mid-cap stocks such as DSPBR Micro Cap funds, which has a higher investment risk and is more aggressive when compared with other mid- and small-cap funds.
In the same vein, there are thematic and sector funds which follow narrow investment styles of focusing on certain specific sectors such as infrastructure, banking or technology. These funds are highly aggressive because of the portfolio concentration, which investors in such funds should be aware of.
Following the Value Research Fund Classification will help you understand the aggressive nature of funds to invest in them depending on your risk tolerance and investment time frame.