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<item> <title>How to invest in mutual funds with a “moderate risk appetite?”</title> <link>https://freefincal.com/how-to-invest-in-mutual-funds-with-a-moderate-risk-appetite/</link> <pubDate>Wed, 18 Feb 2026 00:30:04 +0000</pubDate> <dc:creator><![CDATA[M. Pattabiraman]]></dc:creator> <guid isPermaLink="false">https://freefincal.com/?p=236124</guid> <description><![CDATA[Readers often ask us, “I have a moderate risk appetite; how should I invest in...]]></description> <content:encoded><![CDATA[<figure><img src="https://freefincal.com/wp-content/uploads/2024/12/How-to-invest-in-mutual-funds-with-a-moderate-risk-appetite.jpg" class="type:primaryImage" /></figure><p>Readers often ask us, “I have a moderate risk appetite; how should I invest in mutual funds?” or “Which mutual funds should I choose with a moderate risk appetite”?</p> <p>“What does moderate risk appetite mean?” We cannot define in any meaningful way what risk appetite is, let alone categorize it as low, medium, or high. That said, determining risk appetite is a regulatory requirement, and expensive tools exist. An honest, experienced financial advisor would tell you at least two facts about assessing investor risk.</p> <p>One, it is like asking a person with no preparation or experience what percentage of a marathon he is likely to complete. Two, how an investor reacts to huge gains or losses can be known only after the event occurs.</p> <p>Offering suggestions to an investor who says, “I am scared of equity” is relatively easier than self-proclamations of moderate and high-risk appetites. See, for example, <a href="https://freefincal.com/how-to-invest-without-using-mutual-funds/">How to invest without using mutual funds</a>.</p> <p>Investors should not be making assumptions about their risk appetite. I only saw my first equity crash after 12 years, and in hindsight, though it seemed steep, the quick recovery has diminished the “pride” associated with the experience.</p> <p>Even after nearly 16 years of investing (the first five with zero returns), my risk appetite has not yet been severely tested. I have no idea how I will react at that time. I have no idea what my risk appetite is. I have no idea what my risk tolerance is. All I know is what risk is necessary for my financial goals, and I am confident my portfolio risk levels are close to these. This is good enough to manage a portfolio. For details, see <a href="https://freefincal.com/portfolio-audit-2023-the-annual-review-of-my-goal-based-investments/">Portfolio Audit 2023: The Annual Review of My Goal-based Investments</a>.</p> <p>Advisors should focus on assessing a person’s <strong>risk quotient</strong> (RQ), not risk appetite. Even an ignorant investor can have a high-risk appetite (some would argue it is high <em>because</em> of ignorance). Of course, to do this, advisors should have a respectable RQ and people who worry about such <em>practical </em>difficulties are better off DIYing!</p> <p><strong>What does RQ mean?</strong> Ask yourself or any of your friends who have invested in equity (stocks or MF): What return do you expect from your investments over the next 15 years? If the answer is <em>just </em>a number like 12% or 10%, then their RQ is insufficient to be successful in equity.</p> <p>Why? The spread in max and minimum returns possible from equity over any period – 5 or 15 years – is so large that no one can sit and expect a return. See: <a href="https://freefincal.com/do-not-expect-returns-from-mutual-fund-sips/">Do not expect returns from mutual fund SIPs! Do this instead!</a></p> <p><strong>Fact:</strong> Returns from equity are uncertain no matter what you do. So, a combination of low expectations, suitable investments and systematic portfolio management is necessary and reasonably sufficient to create enough wealth for our future needs.</p> <p>Judging the proximity of the client’s response to the fact, RQ can be assessed by advisors as, say,</p> <ol> <li><strong>inadequate</strong> to start investing or even provide advice</li> <li><strong>amenable</strong> to suggestions</li> <li><strong>superior </strong>= easy to work with (advisor may not be necessary)</li> </ol> <p>Type 1 clients can be directed to simple literature on the “basics”, and types 2 and 3 can be taken on. If a self-assessment is being made, type 1 investors should not be in a hurry to invest.</p> <h2>What mutual funds should I choose if my risk appetite is moderate?</h2> <p>Excuse me for taking a dim view of your RQ if you expected to see a list of mutual funds and got irritated by the above discussion. The simple truth is, if you cannot know your risk appetite, there is no way for me to know it. So only the usual yadda-yadda like “having adequate equity exposure for long-term goals” can be coughed up.</p> <p>Typical moderate risk appetite recommendations include aggressive hybrid funds, multi-asset funds, balanced advantage funds or dynamic asset allocation funds. Nothing is wrong with such suggestions, but it is important to remember that all these categories fall to different extents if the market falls. If the Nifty fell by 30% and your fund fell by 20%, I have no idea how you would react when actual money is invested.</p> <p>Emotionally, 20% is not 10% less. Some could say I expected it not to fall at all or much less. This is why risk appetite assessment is so tricky. The situation is similar to marks vs intelligence.</p> <p>If I conduct an exam for my students, I can only gauge how they have systematically satisfied the system’s requirements. I have no idea how intelligent they are. No one knows, and no one needs to know.</p> <p>To graduate, a student should appreciate the system’s needs and fall in line (no system is without fault, but hey, it is a choice!). Similarly, investors should appreciate their future needs and seek appropriate solutions. They should not get carried away by untested, unsubstantiated opinions of how much loss (or gain) they can stomach.</p> <p>So what should investors do? Assuming this is for a long-term goal (say 25 years), gradually increase your equity exposure with an index fund. Start with, say, 5%-10% of your monthly investment. Gradually increase it over the next few years. Observe and record how much the fund value fluctuates all the time. Get used to the volatility.</p> <p>Force yourself to invest a little extra if the market’s monthly return is negative. Force yourself to invest regularly without worrying about the market’s current condition. Limit equity exposure to no more than 50% to 60%. Once you hit this mark, start thinking about how you will manage this risk, in particular, gradually reduce this equity exposure. In the meantime, as per market movements, your ability to handle risk will be tested in real time with real money. There is no other way.</p> <p>The post <a href="https://freefincal.com/how-to-invest-in-mutual-funds-with-a-moderate-risk-appetite/">How to invest in mutual funds with a “moderate risk appetite?”</a> appeared first on <a href="https://freefincal.com">freefincal</a>.</p> ]]></content:encoded> <post-id xmlns="com-wordpress:feed-additions:1">236124</post-id> </item>
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