Don't rely on funds' risk profile for full picture

It is a starting point but consider other aspects such as performance, portfolio quality to evaluate schemes

Does it help investor evaluate the fund? Vikaas Sachdeva, CEO of Edelweiss Asset Management, says such warnings would help first-timers do-it-yourself investors to understand risks associated with uncommon products such as monthly income plans or arbitrage funds but investment decision should not be based on them.  Experts believe in some cases, it might help curb mis-selling. Many times intermediaries wrongly market sector funds to gullible investors. Such warning may make them question the agent. Other than this, most investment advisors see little purpose of the representation.

It neither gives protection nor guidance say experts. “If the graphic says equity is risky, which is well-known, should an investor go for the scheme or refrain from investing,” asks Hemant Rustagi, CEO of Wiseinvest Advisors. He feels that risk associated with a scheme is not something simple enough to decipher looking at a graphic. A mid- or small-cap fund, for example, is riskier than large-cap funds. But both of them would be categorised in moderately high risk category.

Arvind Sethi, MD and CEO at Tata Asset Management, says each investor has his or her own risk perception. Those who have a long term horizon in equities don’t think it’s a risky asset class. “While this move is a step in financial awareness, investors should either seek expert advice before investing or educate themselves about mutual funds.”

Before investing, the person should look at his or her own risk profile and investment goals. For a long term, equity is the best asset class. For short term (two-five years), debt makes more sense. Then, understand characteristics of the fund, its performance in different market conditions, pedigree of the firm and fund manager, and charges. Risk will always remain in market-linked instruments.