Mutual Fund Riskometer – Understand Risk in Mutual Funds

Mutual Fund Riskometer is a new way of understanding risk in mutual funds.  SEBI has in 2013 come up with the concept of product labeling in mutual funds for the awareness of investors.  (vide circular SEBI circular no. CIR/IMD/DF/5/2013 ).  Product labelling in mutual funds has 3 types of risk labels and looks as below.

mutual fund riskometer - product labeling in mutual funds

Now after much consultations, SEBI has come up with mutual fund riskometer  which is a pictorial meter.  This new pictorial riskometer will replace earlier product labeling method with effect from 01 July 2015.

Five levels of risk identification with mutual fund riskometer

1)  Low – principal at low risk.

2)  Moderately Low – principal at moderately low risk.

3)  Moderate – principal at moderate risk.

4)  Moderately High — principal at moderately high risk.

5)  High – principal at high risk.

The new classification of risk in mutual funds into 5 categories will help investors to better understand the risk involved in any particular mutual fund scheme.

Mutual Fund Riskometer Pictorial Illustration

mutual fund pictorial representation of risk in mutual funds

The above illustration shows how the SEBI’s proposed riskometer for mutual fund schemes of a moderate risk looks like.  The decision of where to place the scheme ranging from low to high is taken by concerned mutual funds while launching the schemes.  AMFI (Association of Mutual Funds in India) has issued best practices guidelines for product labelling mutual funds based on the risk.

This new identification tool for risk in mutual funds is mandatory for all mutual fund schemes from July 01, 2015.  It is applicable for all the existing schemes and the new schemes to be launched on or after that date.  However, mutual fund houses are free to exercise this option before the deadline too if desired.

The noticeable difference is with colour coding.  In their earlier circular SEBI has mandated the colours to be used for each type of risk from blue for low risk to brown for high risk. But interestingly in this new pictorial mutual fund riskometer, no such colour coding is found.  Infact, Red colour was proposed for high risk investments for earlier product labeling of mutual funds but later changed to brown.  This was due to the reasoning of association of red with danger.

Source: pictorial riskometer for mutual funds – SEBI Circular