Risk profile and mutual fund investments

The risk profile is the combination of your ability and your willingness to take the risk. Simply put, it measures how much risk you are able to take (based on quantitative terms) and how much risk you are ready to take (based on qualitative terms). But how does it really matter while investing in mutual funds?
 
Even the disclaimer of mutual funds goes like “Mutual funds are subject to market risks. Please read your offer document carefully before investing”. So mutual funds do carry risk. However, the severity of the risk varies depending on the securities or instruments held by a particular mutual fund.
 
Overnight and liquid mutual funds are the ones which carry less risk as compared to other mutual funds. Sectoral or thematic, followed by the small-cap equity MFs and mid-cap equity MFs are the ones with the highest risk. It is said that higher the risk, higher the possible returns and vice-versa. However, it is important to understand that high risk does not necessarily mean higher returns. There are various parameters that you need to consider. The returns depend on factors including the market, economy, global economic situation and fund manager's decisions.
 
Your risk profile gives you the complete picture on how much risk you can take and based on the same you must consider investing in mutual funds. Different people define risk profile differently. Some may have five categories viz. Conservative, moderately conservative, moderate/balanced, moderately aggressive and aggressive or may have categories like very low, low, medium, high and very high. Some may also have three categories as conservative, balanced and aggressive or low, medium and high. In any case, it is important that the risk profile assessment must be comprehensive enough to cover various factors that may trigger your risk-taking decisions. There are various tools available online, which help assess your risk profile.