All market-linked investments, including mutual funds, are exposed to varying levels of market risk. The key to successful investing is not the elimination of market risk but taking effective risk management measures through prudent portfolio selection and periodic rebalancing as per one’s risk appetite.

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Here are some tips for managing the risk to your mutual fund portfolio:

Factor in your risk appetite during fund selection

Your risk appetite will primarily depend on your liquidity, income stability and time horizon of various financial goals. For example, those having long-term financial goals like creating retirement or a child’s higher education corpus would be more comfortable in investing in equity mutual funds as the long-term investment horizon of such financial goals would give them more time to recoup from the losses arising from short term market volatility. Moreover, equity as an asset class tends to beat other fixed-income investments by a wide margin over the long term.

Similarly, investors facing income uncertainties may have to allocate higher investments in debt funds to preserve capital and ensure liquidity for dealing with periods involving strained incomes and cash flow. Given that different mutual fund categories involve different levels of risk appetite, always make sure to factor in your risk appetite during fund selection.

Use SIP mode of investment for disciplined investing

Systematic Investment Plan (SIP) is a mode of mutual fund investment, which allows investors to invest a predetermined amount in a mutual fund scheme at regular intervals, like monthly, quarterly, annually, etc. As the SIPs investments are spread over a period of time, it helps in averaging the investment cost during market corrections.

Always try to continue with SIPs for a longer period, at least for 5-7 years, to make the most from an entire investment cycle. Also, given that the SIP instalments get auto-debited from your bank account, adopting the SIP mode of investment would instil financial discipline, ensure regular investments and eliminate the need for market timing.

Diversify your MF portfolio

Investors new to mutual funds often tend to invest their entire investible surpluses in just one or two mutual fund houses, which have generated higher returns in the near past. However, such investors fail to realize that doing so can concentrate the market risk in just the chosen one or two fund management teams. In case, the selected fund(s) performs badly due to incorrect investment strategy of the fund manager or other market factors, then their entire investment would end up underperforming the broader market for a long period of time.

Hence, make sure you diversify investments across multiple fund houses to reduce their concentration risk. This way, even if one of the chosen funds fails to perform, the other funds may be able to generate adequate returns to make up for the losses.

Periodically review your MF investment portfolio

A periodic review of your mutual fund’s performance will allow you to detect underperforming funds and rectify the deviations, if any, from the original asset mix set for your financial portfolio. Keep in mind that market factors and fund management styles can lead even the top-performing funds of the past to remain laggard for a considerable period of time. Therefore, compare your funds’ performances with their benchmark indices and peer funds on a quarterly basis. Redeem funds that consistently underperform their peers and benchmarks over the last 3 years.

Refrain from investing in NFOs just because of their low NAVs

New Fund Offers(NFOs) are first-time subscription offers of new mutual fund schemes issued at face values of Rs 10. However, many distributors up-sell the NFOs by wrongly focusing on just their lower NAVs. Investors should instead factor in the previous track record of other funds managed by the NFO’s fund manager and the concerned fund house.

Go for an NFO only if it aligns with your financial goals and risk appetite. Investors with a higher risk appetite and the capability to track the concerned theme/sector closely for timing your investment and redemption can opt for an NFO of thematic or sector mutual fund. Else, stick to existing MF schemes holding good past track records of beating their benchmark indices as well as peer funds.

The author, Sahil Arora, is Director at Paisabazaar.com. The views expressed are personal