According to an Axis MF survey, 61% of investors and 73% of investors do not understand risk-o-meters

 According to an Axis MF survey, 61% of investors and 73% of investors do not understand risk-o-meters

Only 27% of survey participants truly take their risk appetite into account when making investing decisions, according to Axis Mutual Fund's study on "Risk Comprehension" among Indian investors. Over 1,700 Axis MF investors participated in the poll, which was then released on September 25, 2023, in its "India Investor Risk Report".

According to the report, only 27% of investors give it any thought despite recognizing the value of "understanding risk appetite" at 89%. Additionally, 53% of investors indicated they lacked trust in their ability to evaluate their personal risk when choosing mutual funds.

According to B. Gopkumar, MD & CEO of Axis AMC, the poll also aimed to determine how well investors understood the resources available for risk assessment. It attempted to gauge the amount of knowledge about the risk "profiler" and "Risk-o-meter" instruments. More than 60% of respondents weren't familiar with either tool. The tools, he claimed, are crucial when MF folios reach new heights. As of August 31, 2023, the industry's assets under management (AUM) totaled Rs. 46.63 trillion with 15.42 crore total folios.

Major Findings

Significantly, 59% of investors still use historical performance as their primary yardstick when choosing mutual funds to invest in. Despite being aware of the advantages of long-term investing and compounding, investors frequently prematurely redeem their investments because of market noise, according to the fund firm.

Data from the Association of Mutual Funds in India (AMFI), as stated by Axis Mutual Fund, showed that while a significant 48.7% of stock investors redeem their portfolios within two years or less, only 22.2% of equity investors keep investments for 12 to 24 months. Additionally, 15.6 percent of equity holdings are not held for longer than six months, and 10.9 percent are held for between six and twelve months.

Understanding risk appetite is important

Understanding one's risk tolerance is essential while investing in mutual funds. Investors need to match their risk tolerance to their investment objectives. Long-term investors that are more willing to take on risk can choose an aggressive investment approach that puts rewards above safety. However, short-term objectives need a concentration on safety and liquidity.

A crucial factor in stock selection is risk appetite. Mid-cap stocks have a higher risk than small-cap stocks, which have the lowest risk of the three.

Risk-O-Meter and Risk Profiler

64% of respondents who said they took risk appetite into account were unaware of the "Risk Profiler" as a tool for doing so. Only 12% of people felt secure using this measure to gauge their comfort level with taking risks. Risk profilers are online calculators that can be found on the websites of all fund houses. They help investors understand how their returns can turn out in different situations and demonstrate the level of risk they are willing to face.

In addition, 61% of respondents were unsure of what a "Risk-o-meter" represents. Each mutual fund's scheme document has these meters, which are necessary to comprehend the risk associated with the fund. Only 16% of those who were aware of it used the "Risk-o-meter" before investing.

The Axis Mutual Fund survey emphasizes the need for investors to have a better awareness of risk. This is essential since the survey reveals that many investors let market noise influence their selections, which can raise volatility in the mutual fund market.