Axis Mutual Fund’s survey aimed at understanding “Risk Comprehension” among Indian investors, found that only 27 per cent of respondents actually consider their risk appetite when making investment decisions. The survey published in its “India Investor Risk Report” on September 25, 2023, received responses from over 1,700 Axis MF investors.
The survey found that 89 per cent of investors recognise the importance of “understanding risk appetite” but only 27 per cent consider it. Also, 53 per cent of investors said they lacked confidence in assessing their personal risk while selecting mutual funds.
B. Gopkumar, MD & CEO of Axis AMC, said that the survey also sought to gauge investors' understanding of tools available for assessing risks. It tried to assess how many people were aware of tools called “Risk-o-meter” and risk “profiler”. Over 60 per cent of respondents were unaware of both tools. He said the tools are important as the MF folios reach new highs. Likewise, the industry’s assets under management (AUM) reached Rs 46.63 trillion as of August 31, 2023, with 15.42 crore total folios.
A significant 59 per cent of investors still prioritise past performance as a key benchmark for mutual fund investments. Influenced by market noise, investors often prematurely redeem their investments, despite understanding the benefits of long-term investing and compounding, the fund house said.
Data from the Association of Mutual Funds in India (AMFI), as cited by Axis Mutual Fund, indicated that 22.2 per cent of equity investors hold investments for 12-24 months, while a substantial 48.7 per cent redeem their portfolios within two years or less. Further, 15.6 percent of equity assets don’t stay invested for more than six months, and 10.9 per cent of equity assets stay invested for 6-12 months.
Understanding one's risk appetite is crucial in mutual fund investing. Investors must align their risk profile with their investment goals. For those with long-term aspirations and a higher risk appetite, an aggressive investment strategy, prioritising returns over safety, can be followed. But, short-term goals necessitate a focus on safety and liquidity.
Risk appetite also plays a pivotal role in stock selection. Large-cap stocks come with lower risk, mid-cap stocks have higher risk, and small-cap stocks present the highest risk.
Of those who claimed to consider risk appetite, 64 per cent were unaware of “Risk Profiler” as a tool to evaluate risk appetite. Merely 12 per cent were confident in assessing their risk-taking ability using this tool. Risk profilers are calculators available online on every fund house's website and assist investors in understanding how their returns might pan out in various scenarios and shows the magnitude of risk they can take.
Furthermore, 61 per cent of respondents were unaware of what a “Risk-o-meter” indicates. These meters are included in each mutual fund's scheme document and are essential to understand the fund's risk. Only 16 per cent of those who knew about it checked the “Risk-o-meter” before making investments.
The Axis Mutual Fund survey underscores the need for better risk understanding among investors. This is crucial as the survey shows that many investors make decisions influenced by market noise, which can contribute to increased volatility in the mutual fund market.