How to reduce risk in mutual funds

You cannot remove the risk of the market, but you can stop taking risks your goal does not need. The biggest step is putting each rupee in a kind of fund that fits when you will need it. After that, spread your money across different kinds of holding and your buying over time. Avoid owning the same thing twice, and rebalance when the mix drifts.

None of this makes the market safer. It changes how exposed you are when the market falls.

How can you reduce the risk in your mutual funds?

Five levers reduce it, and they matter in roughly this order.

1. Fit the category to the time you have. A category is SEBI's label for what a fund may hold.
2. Spread your money across different kinds of holding.
3. Spread your buying over time. A SIP invests a fixed amount at regular intervals, usually monthly. An STP moves a fixed amount from one fund to another at intervals.
4. Avoid owning the same thing twice.
5. Rebalance when the mix drifts. Rebalancing means bringing your mix of funds back to the one you set.

The table shows what each lever does and does not do. NAV, in the third row, is the price of one unit of a fund.

Why does the right category matter most?

Because a category decides what a fund can hold. A fund that holds small companies can fall a long way before your goal's date arrives.

Koshex suggests different categories for different time horizons. These are suggestions for matching time to category, not a rule.

The category pages explain what each of these holds.

What does the cost of the wrong category look like?

It can mean money worth well under half when the goal arrives.

Take a goal about two years away, with money placed in small companies. A small cap company is one ranked 251 onwards by market cap. SEBI requires small cap funds to hold at least 65% in such companies.

The NIFTY Smallcap 250 is an index, a list of small companies picked by fixed rules, whose combined value is tracked every day. It fell from 7,568.30 on 15 January 2018 to 2,967.45 on 24 March 2020. That is a fall of 60.8%.

Suppose ₹2,00,000 had gone in at the 15 January 2018 close. By the 24 March 2020 close it would have been about ₹78,418. That is well under half, a little over two years later, just when a two-year goal needed the money.

This is a past price index. It leaves out dividends, costs and tax, it is not a fund, and it is not a forecast. Every listed small cap fund read Very High on the riskometer on 29 September 2026. Read more in the small cap funds page, or see what a short duration fund holds.

How do you use the riskometer and product label?

Use them as the first filter. The riskometer is SEBI's risk label, with six levels from Low to Very High, worked out every month. It appears on the application form, the scheme documents and wherever returns are shown.

The product label states the fund's nature: "to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term)". Put your goal's date beside both. If you want to know how much fall you can sit through, read about risk tolerance.

This section is about choosing at the start. What to do as a goal comes close is covered in when to sell a mutual fund.

Does spreading money across equity, debt and gold reduce risk?

It spreads the risk, but it does not remove it. Different categories carry different riskometer levels. On 29 September 2026, most listed liquid funds read Low to Moderate. These hold only debt and money market paper maturing within 91 days. Most listed gold funds read High. Every listed mid cap fund read Very High. Hybrid funds mix equity and debt inside one fund in set ranges. A conservative hybrid holds 10–25% in equity and an aggressive one 65–80%. A multi asset allocation fund holds at least three asset classes, kinds of holding such as equity and debt, with at least 10% in each. AMFI, the mutual fund industry body, lists "Event Risk: Price risk due to company or sector specific event" among its risks. If your money sits in several kinds of holding, one company's bad news reaches a smaller share of it. The same AMFI text says a fund's NAV "may fluctuate with movements in the broader equity and bond markets". So spreading cannot stop the whole market falling. For how many funds to hold and how to spot overlap, read mutual fund diversification.

Do SIPs and STPs lower risk?

They spread your purchases over time. They do not protect you from a fall.

A SIP buys more units when the NAV is lower and fewer when it is higher. This is called rupee-cost averaging. The average cost per unit is never above the simple average of the NAVs it bought at. That is all the mechanism does. It says nothing about whether the investment gains or loses.

Nor does it promise more than a lump sum, money invested at one time. If the NAV rises steadily, a lump sum of the same total ends with more units. The comparison is in SIP or lump sum, and is a SIP safe covers what decides a SIP's risk.

An STP works differently. One fund house's scheme document describes it as an option where investors can "transfer a fixed amount at periodic intervals to the designated target scheme". Each transfer sells units of the source fund and buys units of the target. The sale can bring a capital gain (profit on the units sold) or loss. It can also bring an exit load, a fee some funds charge if you sell within a set time after buying. How an STP compares with a switch is in how to switch mutual fund schemes.

How does rebalancing keep risk in check?

It brings a mix that has drifted back to the risk level that was set.

Here is a made-up example, not a recommended mix. Suppose ₹6,00,000 is held as ₹3,60,000 in equity funds and ₹2,40,000 in debt funds. Equity is 60% of the total. Then equity rises 30% and debt rises 5%.

Equity is now ₹4,68,000 and debt ₹2,52,000, a total of ₹7,20,000. Equity is 65% of the total, up from 60%. Nothing was bought or sold, yet the mix now carries more equity risk than was set.

Bringing it back means selling some of what grew. A switch is a sale in one scheme and a purchase in the other, so it can bring an exit load and tax. Equity-oriented fund units held 12 months or less are taxed at 20% on the gain. If held longer, gains above ₹1,25,000 in a tax year are taxed at 12.5%, one allowance per person, under the Income-tax Act, 2025. Koshex customers can switch between schemes of the same fund house on Koshex.

Koshex reviews your holdings over time and flags changes, such as a fund's risk level shifting. The steps and timing are in how to rebalance your mutual fund portfolio.

What risk can you never remove?

Market risk. The standard warning in mutual fund advertising reads: "Mutual Fund investments are subject to market risks, read all scheme related documents carefully."

AMFI's risk factors say investments in equity and equity related instruments involve "a degree of risk". Investors "should not invest in the equity schemes unless they can afford to take the risk of possible loss of principal". SEBI's Investor Charter tells investors: "Do not fall for the promise of indicative or exorbitant or assured returns". No one can promise a fund will not fall.

Even government securities, bonds issued by the government, are not free of it. The Reserve Bank of India says they "carry practically no risk of default" but still face market risk from "changes in interest rates".

The lowest riskometer level is still a level. The caption reads "The risk of the scheme is [level of risk]", and there is no "no risk" level among the six. A Low reading means some risk.

When the market falls sharply, Koshex talks you through it before you redeem. Whether to sell or stop in a fall is covered in should I redeem my funds since the markets are down. The risks themselves are named in risks involved in mutual funds, and to check one fund's numbers see 5 ways to measure mutual fund risk.