Risk Appetite — Mutual Fund Term Explained

Your willingness and ability to accept potential losses in exchange for higher returns. The fundamental factor in choosing the right fund.

Risk appetite has two dimensions: willingness (psychological comfort with market falls) and ability (financial capacity to absorb losses without affecting goals).

Your risk appetite determines your ideal asset allocation. High-risk-appetite investors can hold more equity; low-risk investors should hold more debt even if it means lower returns.

Related terms

• Asset Allocation — How you distribute investments across asset classes — equity, debt, gold. The single biggest factor in long-term portfolio returns and risk.
• Investment Horizon — How long you plan to stay invested. Longer horizons allow more equity exposure; shorter horizons require safer assets.
• Drawdown — The percentage decline from a fund's peak NAV to its subsequent trough. Shows how badly a fund fell from its high point.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.