Do you know the use of Riskometer to Mutual Fund investors?

Whenever you open a scheme-related document, one of the first things you will see is a semicircle with an arrow pointing towards the ‘Risk’ levels associated with that fund. In 2015, SEBI introduced the ‘Riskometer’ as a benchmark of risk in the given scheme. Before that, fund houses would colour code risk in blue, yellow, and brown codes to indicate low, medium, and high risk, respectively.

Riskometer is a standardised risk measurement scale introduced by the Securities and Exchange Board of India (SEBI) for Mutual Funds. It is a graphical depiction of the risk profile of a mutual fund scheme. All mutual fund scheme documents have to display the riskometer upfront and clearly so that investors know the risk associated with that particular fund.

A riskometer shows the level of risk associated with the principal amount invested in a mutual fund. The riskometer consists of 5 levels: low, moderately low, moderate, moderately high, and high. The graph is designed as per the Association of Mutual Funds in India (AMFI) guidelines. It resembles the speedometer of a vehicle and displays 5-levels of risk, each with a respective colour.

Low Risk: The funds that fall under this category have the least risk due to their underlying securities, making them suitable for individuals seeking capital protection to some extent.

Low to Moderate Risk: These are for investors willing to take a bit of risk to get some returns over a medium to long time.  These funds are debt funds known as Ultra Short Duration Funds that lend to companies for a period of 3 to 6 months. It is best suited to investors with an investment horizon of around six months and a lower-risk preference.

Moderate Risk: This is ideal for investors who aim to expand their portfolio by taking some risks. Most dynamic bond funds fall under this category. This fund is suitable for at least a 3-5-year investment horizon.

Moderately High Risk: These funds hold a somewhat higher level of risk and might suit investors with a slightly higher risk profile. These are for investors willing to accept some uncertainty and greater volatility in exchange for the prospect of achieving higher growth or profitability. Tend to generate higher returns than funds returns but take a higher risk too.

High Risk: Funds in this category mainly invest in equities. They are ideal for those willing to take on high risk for prospective gains.

The riskometer introduced back then, however, did not capture the granular risks associated with mutual fund schemes. Thus, SEBI further refined it to identify and classify risk under low, low to moderate, moderate, moderately high, high, and very high risk based on their categories.

The master circular determined risk based on the actual underlying holdings of a fund, recognising market capitalisation, volatility, and liquidity in the riskometer. Over the years, it has worked well on the equity as well as debt side, promoting transparency amongst investors.

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