What is the co-relation between risk and return?

In Mutual Funds, one often hears, ‘more the risk, more the return’. Is there truth in this?

If ‘risk’ is measured as either, probability of loss of capital or as swings and fluctuations in investment value, then asset classes like equity are undoubtedly the riskiest, and money in a savings bank account or in a government bond is of course least risky.

In the Mutual Funds universe, a liquid fund is least risky and an equity fund is most risky.

So, the only reason to invest in equity would be an expectation of higher reward. However, higher returns come to those who invest in equity after careful study and adopting a patient, long term time horizon. In fact, risk in equity can be mitigated by adopting diversification as well having a longer term time horizon.

Every category of mutual fund schemes have different types of risks – credit risk, interest rate risk, liquidity risk, market/price risk, business risk, event risk, regulatory risk, etc. The knowledge of financial experts like your mutual fund distributor / investment advisor and the fund manager, along with diversification, can help mitigate them.