Mutual Funds Riskometer by SEBI - How to measure risks?

Mutual Funds Riskometer by SEBI

Investment decisions are normally founded on an investor's risk hunger. Somebody in their initial or mid-twenties may have a forceful methodology towards investing in equities, while a retired individual is probably going to favor risk-loath fixed-income investments.

To assist investors with monitoring the risks related with mutual fund investments, SEBI has made it required for all fund houses to display a riskometer portraying the five levels of risk viable July 1, 2015.

As indicated by the standards, 'the shading codes should be displayed on the front page of the application forms close to the name of the scheme.' These shading codes will be illustrative of the financial risk related with the scheme.

According to the SEBI circular, 'The portrayal of risk utilizing shading codes would be supplanted by pictorial meter named riskometer and this meter would fittingly portray the level of risk in a particular scheme.

(Also Read: Best Mutual Funds to invest in 2021)

Understanding the Riskometer

Association of Mutual Funds in India (AMFI) has given clear guidelines on how a fund would be characterized under the various levels of risk.

As demonstrated in the figure, the riskometer has five levels of risks. It is made to appear to be like a car's speedometer and demonstrates the scheme's risk level. The five risk levels are 'low', 'moderately low', 'moderate', 'moderately high' and 'high'. Let' see every one of them.

The prior adaptation of the riskometer had three tones blue, yellow and brown speaking to low, medium and high levels of risks individually. In any case, AMFI felt the representation was deficient and chosen to redo the riskometer by categorizing the risk level into five levels. This assisted investors with improving image of the correct risks related with a specific fund.

Low-risk level

Securities and instruments, for example, fixed maturity plans, gilt funds and income funds typically go under this order. These are viewed as the safest mutual funds and are appropriate for an investor searching for a protected income source. The riskometer shows green color for low-risk level. Income funds, gilt funds, and fixed maturity plans with a maturity of less than 90 days falls under the low-risk category.

Moderately low-risk level

Short to medium-term bonds generally go under this classification. They are viewed as protected investments and are appropriate for investors who can remain contributed for a period of 1-3 years. Moderately low-risk level is recognized when the riskometer shows light-green color. Short and medium-term bonds with a maturity period of 91 days to 3 years falls under the category of Moderately low-risk level. Investors who can take nominal risks but also prioritize the safety of their investment can go for this category.

Moderate risk level

It connotes that the funds in this classification have their principal at moderate risk. Investments like exchange funds, MIP funds, and hybrid debt-oriented funds are appropriate for a semi-conservative investor who expects to book decent profits simultaneously needs to keep his risk restricted. Funds under this name are fit medium to the long-term investment horizon. When the riskometer shows yellow color, it indicates moderate risk level. Hybrid debt-oriented funds, monthly investment plans (MIPs), and arbitrage funds falls under the category of moderate risk. Investors willing to invest longer than short-term and who are ready to undertake a certain degree of risk for slightly lucrative returns can go for this category.

Moderately high-risk level

It means that the funds in this class have their principal at moderately high risk. Normally, balanced equity-oriented funds, diversified equity funds, index funds and Gold ETFs are characterized under this mark. Products under this mark are appropriate for investors trying to create wealth over a long period. Investment in equity under such funds is identified with the large-cap portion. Moderately high-risk is identified when the riskometer shows orange color. Gold ETFs, index funds, diversified equity funds, and balanced equity-oriented funds with an equity exposure of upto 20% of the portfolio falls under the category of moderately high risk. Investors who want to invest for long-term and are ready for some degree of risk.

High-risk level

This mark implies that the funds in this class have their principal at high risk. Sectoral funds, thematic funds, international funds and micro-cap funds are a couple of instances of funds under this name. Products under this mark are appropriate for investors trying to create wealth throughout a long period of time and approve of the high risk related with their bet. High risk is recognized when the riskometer shows red color. Micro-cap funds, international funds, thematic funds, and sectoral funds falls under the category of high-risk. These are likely for high net worth individuals or aggressive investors willing to invest for long-term and are ready for the risk of incurring losses.

(Also Read: Equity Linked Saving Scheme)

Risk profiling of investors

Like the risk marks on the riskometer, investors can likewise be arranged dependent on their capacity to face challenges in investments. See which band you fall into.

Riskometer mark - Suitable Investor Type - Investor Persona

Low - Conservative - Investor's main concern is the security of capital. She/he is happy to acknowledge generally low returns against a low risk of principal.

Moderately Low - Moderately Conservative - An investor is happy to acknowledge a little level of risk in exchange for some likely returns over a medium to long-term.

Moderate - Moderate - An investor can endure a moderate level of risk in exchange for generally higher possible returns over a medium to long-term.

Moderately High -Moderately Aggressive - Investor is quick to acknowledge a generally higher risk to augment likely returns over the medium to long-term.

High - Aggressive - Investor is happy to acknowledge a critical risk to amplify likely returns over the long terms and knows that she/he may lose a huge piece of the capital.

What an investor should remember while using the Riskometer?

Since the universe of mutual funds is immense with many funds out there, investors can utilize the new riskometer to pick schemes which are in a state of harmony with their risk craving. This meter is particularly helpful to investors who are new to the universe of mutual funds and typically rely upon the counsel of their financial advisors.

In any case, However, it is crucial for note that albeit the riskometer can give a general thought of the risk level, there are numerous variables included that ought to be thought of while choosing a fund and a riskometer ought not be the sole indicator.

Consequently, it is essential to get your work done and wisely settle on the decision with respect to your investments.