This article helps you understand which categories of equity funds are the safest for investors.

📚 Table of Contents

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• Why look for safety in equity mutual funds?
• How to measure the risk of equity mutual funds?
• Which are the safest fund categories?

Why look for safety in equity mutual funds?

Equity mutual funds, by their very nature, are “unsafe”. Their returns fluctuate with time and lead to unpredictable values for a corpus, as we have discussed in detail here: The lie of wealth-creation via SIP in mutual funds

However, many investors will benefit from an inter-ranking of equity mutual funds as per their inherent risk, and this article addresses that point.

Caveat: The data in this article is a point-to-point result produced on the article’s publishing date, using mutual fund data for the previous three years. The ranking and the absolute values of risk will change with time.

How to measure the risk of equity mutual funds?

In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean (also called the expected value) of the set, while a high standard deviation indicates that the values are spread out over a wider range. - Wikipedia

Generally, the higher the standard deviation (SD), the higher the risk of a mutual fund. If a fund has a standard deviation of 15%, its yearly returns are expected to be between -60% to +45%. In general, we can say:

Yearly return range = [-4 * SD, 3 * SD]

We use annualised standard deviation and the last 3-year return data for mutual funds as provided by the Valueresearchonline website.

We have used the SEBI categorisation of funds in defining the categories below. Since hybrid mutual funds also have some equity allocation, we have included them in our list.

Which are the safest fund categories?

We have arranged the fund categories in ascending order of risk. Due to having less than 100% equity allocation in all cases, we see that the hybrid funds are the safest in terms of risk.

A few other observations:

• as the market cap of the funds reduces (large-cap > mid-cap > small-cap etc.), the risk increases
• within diversified funds, large-cap funds have the least risk
• sector or thematic funds have varied amounts of risk. In general, sector funds are riskier than diversified funds
• all international funds are clubbed into one group, but their aggregate risk is lower than diversified domestic funds

Investors should note that looking at only risk is one part of the analysis they need to make to shortlist mutual funds. The next level of study they need to perform is how much return these funds have given, grouped as per risk. We will cover this aspect in a future article.