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Beyond The Hype: Moneyfront's Mohit Gang Explains Hidden Risks In High Reward Funds

Gang calls for investors to delve deeper than just returns and pay close attention to metrics like standard deviation

<div class="paragraphs"><p>Gang calls for investors to delve deeper than just returns and pay close attention to metrics like standard deviation (Image source: Unsplash)</p></div>
Gang calls for investors to delve deeper than just returns and pay close attention to metrics like standard deviation (Image source: Unsplash)

Investors often take the equity route lured by dazzling returns from sectoral funds like defence or the unique strategy offerings. While on this route, the potential for high returns often overshadows the risks for many.

Mohit Gang, co-founder and chief executive officer of Moneyfront, offers a reminder that equities and risk go hand in hand, emphasising that both drowning and floating happens in the well of equity.

"While various equity formats exist, each carries a distinct risk profile, and it’s important to remember that during market corrections, all formats can undergo corrections," he said.

Gang calls for investors to delve deeper than just returns and pay close attention to metrics like standard deviation. This metric measures how much the category swings from the mean that has been observed.

"None of the ratios like down capture ratio or a Sortino ratio cannot be looked at in isolation but needs to be looked at on a whole," he warns.

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How To Understand Risk?

One way to understand risk, according to Gang, is through market capitalisation.

"Large-cap funds typically exhibit a standard deviation of hardly 6% to 7%. And, as one goes down the ladder to mid caps, the percent increases due to liquidity and other constraints," he said highlighting how volatility rises across various categories.

Beyond market cap, certain investment strategies bring in higher risks that investors might overlook. Gang specifically flags momentum funds, which see maximum correction when the momentum of the market breaks.

"Similarly, while contrarian funds aim to capitalise on turnarounds in beat down companies, one cannot always bet on these turns," he said.

Gang also brings into perspective the recent hard beating taken by PSU themes from October to March, after the rally that the sector saw earlier.

Funds That Gang Flags As Risky

Gang highlights the risk in emerging market funds like China, Nikkei, or Hang Seng ETFs, where the stability of these emerging markets depends on news to an extend.

"Investing in a US Index fund, is fine given it's a matured index," he said concluding that as one diversifies to emerging markets, there will be a risk.

Beyond all of this, Gang stresses the importance of mental preparedness for negative returns among investors.

"So as investors invest, it's important to be mentally prepared for even negative returns according to the risk," he said.

While some funds in the market employ deviation to hedge their portfolios, he notes that there are only a few such funds that are available. He anticipates more options with the introduction of the new SIF category.

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