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Know your risk appetite – evaluate how much investment is best for you

Know your risk appetite – evaluate how much investment is best for you

In order the select the right mutual funds for your financial needs, you should invest on the basis of your investment goals and risk appetite. There are various factors that influence risk appetite like investment tenures, age, stages of life, financial conditions and the investor’s general attitude towards risk. Risk and return are directly related. It is important to know your risk appetite and base your investment decisions on it because different investment products have different risk profiles.

Debt mutual funds are less volatile than equity mutual funds. Various types of equity mutual funds have different risk profiles. For example, large cap funds are more stable than mid cap or small cap funds. Large cap funds invest across companies in different sectors with a view to diversify company specific risk and sector risks. Large companies are perceived to be less risky than midcap and small cap companies. Therefore, large cap funds are suitable for investors who do not have high appetite for volatility.

As per SEBI guidelines, the top 100 listed companies in terms of market capitalization are categorized as large cap companies. Market capitalization is defined as the share price of a company multiplied by the number of shares (of the company) outstanding. Typically, large cap companies have market capitalizations exceeding Rs 10,000 Crores. These are well known companies with a fairly long history. These companies command a high percentage of the market share in their respective industry sectors.

Given their large size, investors believe that these companies are better placed to survive downturns in the economy compared to smaller companies; as a result these companies are perceived to be less risky and investors are ready to pay a premium for their shares. Since large cap stocks are often richly valued, these stocks may give lower returns compared to mid / small cap stocks, but these stocks tend to be more stable (less volatile than mid / small cap stocks).

Over the last 3 years or so, large cap funds have underperformed mid cap funds but over the last 2 months or so large cap funds are outperforming midcap funds. The downside risks of large cap funds in volatile market tend to be lower than midcap funds and these funds can provide stability to an investor’s portfolio. Top performing large cap funds have given excellent returns over sufficiently long investment tenures in the past. Reliance Focused Large Cap Fund gave over 16% annualized returns in the last 5 years (period ending February 28, 2015) beating its benchmark index, Nifty 50. In the last 1 year, Reliance Focused Large Cap Fund gave 13.69% returns. Rs 10,000 invested in Reliance Focused Large Cap Fund 5 years back (period ending February 28, 2015) would have grown to nearly Rs 30,000 by February 28. 2015 (Source: Valueresearchonline.com – as on 14/2/18)

Reliance Focused Large Cap Fund intends to create a focused portfolio consisting of 25 stocks primarily investing in the Top 100 companies by market capitalization. At least 75% of the portfolio at any point of time is invested in the Top 100 Companies by market capitalization. The fund may have a tactical allocation to niche businesses (beyond the Top 100 Companies) which are market leaders in their respective segments.

Though this mutual fund scheme is more concentrated (less diversified) compared to the most large cap equity funds, fund manager Meenakshi Dawar makes high conviction bets. She invests in companies with sustainable business models, proven track record with high earnings (EPS) growth potential at reasonable price (GARP). The portfolio of Reliance Focused Large Cap Fund is diversified across sectors, with not more than 25% exposure to a single sector. The fund manager emphasizes on alpha generation through sector rotation.

According to financial planners, large cap funds should form the core of an investor’s mutual fund portfolio.  These funds are especially suitable for new investors or investors who do not have a high appetite for volatility or investors wanting more stability in their portfolio. We have seen that, good large cap funds like Reliance Focused Large Cap Fund can give excellent returns in the long run. Investors can invest in large cap funds either in lump sum or through systematic investment plan (SIP). Systematic Investment Plans are more suitable for retail investors because they can invest in a disciplined way from their regular monthly savings and also take advantage of stock market volatility through rupee cost averaging. Investors should discuss with their financial advisors if large cap funds are suitable for their investment needs.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

“ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF RMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS.”

AN INVESTOR EDUCATION INITIATIVE BY RELIANCE MUTUAL FUND.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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