Last Updated on December 28, 2021 at 6:32 pm
Many investors are under the impression that to get higher returns, one must take on more risk. This is reasonably true if the investment duration is “long enough” and completely wrong for shorter durations. In a two-part post, I consider the risk and return associated with all mutual fund categories. This is an updated version of what I had previously discussed: The key to successful mutual fund investing
In this post, let me take the easy way out and consider a duration of 3 years. The easy way out because the data is readily available at Value Research. Many investors, especially first time ELSS fund investors believe 3 years is “long enough” to get “good returns” from equity. Well, let us find out. In the second part, I shall consider 5Y and 10Y – for this, I need to crunch the numbers myself.
First some basics:
Investment risk
Risk is defined by the standard deviation. That is, the monthly returns of a fund over the last 3Y is calculated. Then we find out the average monthly return and how much each return deviates from the average.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
This measure of “deviation from average” is known as standard deviation. It is a standard, but a simplistic measure of risk (and therefore convenient).
Investment Return
This is simply the last 3Y annualized return or the CAGR
Mutual Fund Categories
These are the present Value Research fund categories. They are set to change due to the SEBI classification, but no harm is looking at what is available now.
Category | Full Form |
EQ-INTL | International Equity funds |
EQ-LC | Equity large-cap funds |
EQ-OTH | Equity “others” |
EQ-MLC | Equity Multicap |
EQ-MC | Equity Midcap |
EQ-TS | Equity ELSS |
EQ-IT | Equity Infotech |
EQ-CG | Equity Consumer goods |
EQ-SC | Equity Small cap |
EQ-PH | Equity Pharma |
EQ-INFRA | Equity Infrastructure |
EQ-BANK | Equity Banking |
DT-LIQ | Liquid funds |
DT-FMP | Fixed maturity plans |
DT-UST | Ultra short-term |
GL-ST | Gilt short term |
DT-ST | Short-term debt funds |
DT-CO | Credit opportunity debt funds |
DT-INC | Debt income funds |
DT-DB | Dynamic bond funds |
GL-MLT | Medium and long-term gilt |
HY-AR | Hybrid arbitrage |
HY-DC | hybrid debt oriented conservative |
HY-OTH | Hybrid others |
HY-DA | Hybrid debt oriented aggressive |
HY-EQ | Hybrid equity oriented |
HY-AA | Hybrid asset allocation |
Mutual Fund Risk ladder
So how do fluctuations in monthly returns increase across categories?
Right from liquid funds (lowest risk) on the extreme left, notice how risk increases in step-wise manner as you head to equity small caps on right (see the sudden spike in risk there). Please spend some time in locating each fund category in this ladder.
Mutual Fund Risk vs Return (3 years)
To plot this, let us first rotate the above graph.
The 3Y return (Y-axis) is plotted vs the 3Y risk. The horizontal axis for both the graphs are the same to enable comparison.
As you go from liquid funds to small-cap funds, notice how the spread in returns increases. There are some extreme points in the bottom right of the graph – these are international funds (eg. world gold mining fund)
Readers may be aware of an “infographic” published earlier: Assorted infographics on personal finance
Can you see the similarity?
As the investment risk (or standard deviation) increases, the range of returns possible increases.
What does this mean?
When risk increases, risk increases!! The return may or may not increase. This is over 3Y. I am curious to see how this changes over 10Y.
Risk per unit return vs risk for all categories
Now we divide the risk by the return and plot it against risk.
Please take a while to spot your favourite mutual fund category in the plot. Notice that as risk increases, the risk per unit return also increases and at the highest levels of risk, the linear trend weakens.
Some data points deviate below the linear trend. Meaning higher returns and higher risk (lower risk/return)
Some data points deviate from the linear trend. Meaning lower returns and higher risk (higher risk/return)
So, Will I get more returns if I take more risk? Over 3 years, the answer is, maybe yes. Maybe no, but I will definitely get higher risk, if I take higher risk. duh!
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! You can watch podcast episodes on the OfSpin Media Friends YouTube Channel. 🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available! Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)