Ask Morningstar: Taking a risky bet

Jan 27, 2023

Can you recommend just one mutual fund or ETF to invest in for 15 years? I can tolerate high risk. In the sense that if everything goes to zero, I can take the hit.

When it comes to investing in equities, having a long-term horizon is paramount as it gives your corpus enough time to be in the market and reap the benefits of compounding. Therefore, having a 15-year horizon is an excellent start.

Since you have not mentioned any more details with regards to your portfolio, I have made a few assumptions:

  • You already have an investment portfolio in place, that is aligned with your risk profile and time horizon for various goals.
  • This investment that you ask about, is a tactical bet and does not corner the bulk of your portfolio.
  • Normally, tactical bets are made in lumpsums at a given point in time. You have not specified whether it should be a lumpsum or regular investments (SIP). So I shall go with the assumption of an SIP.

Since you have emphatically stated that you are comfortable with “high risk” and can tolerate it getting wiped out, I think an actively managed small -cap fund would fit the bill.

Investments in small-caps funds are risky, given the high volatility associated with them and the large drawdowns that these funds can witness.

For instance, during the 2008 GFC, many of the small cap funds which existed during that period fell over 50% and some even up to 75%. Similarly, during the Covid-19 lockdown, the average drawdowns seen in small-cap funds was almost 40%.

Do not stop your regular investment (SIP) during period of large drawdowns. Because over the long haul, they also have the ability to give you returns which are better than large-cap funds.

So which fund should you choose?

  • Look at the long-term track record.
  • A fund manager who has the relevant experience, expertise and strong team.
  • A stable process which has been plied with consistency.

Compared to actively managed funds, ETFs offer significantly lower expense ratios. However, a good small-cap fund that fulfils all the pre-requisites mentioned above, will outperform the benchmark (after taking cost into consideration) over the long haul.

You can look at a few small-cap funds that our analysts rated in 2022:

While I have shared my thoughts based on what you have revealed, I sincerely suggest you take the advice of a financial adviser.

You can view our fund analysis and details on fund portfolios here.

Registered readers can post queries accessing the Ask Morningstar tabOur team will answer SELECT queries ONLY relating to mutual funds and portfolio planning.

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