Mutual Fund Risk Assessment: Understanding the Riskometer

The mutual fund riskometer is a simple representation of the risk a fund carries.

Every mutual fund investment carries some level of risk. Most investors do not know these and either end up staying away from mutual funds or at times invest in funds that do not meet their risk appetite.

While the mutual fund offer documents provide all the information one requires, it is not always presented in an easily readable form. AMFI and various Asset Management Companies continue to strive to educate investors so that they can take the most informed decisions.

Riskometer

To tackle this issue, starting 1st July 2015, the Securities and Exchange Board of India(SEBI) has made it mandatory for all mutual fund schemes to display the 'Riskometer', which is a visual representation of the level of risk involved in the particular scheme.

Existing System

Riskometer is an upgrade from the 'colored product labels' introduced in March 2013 that required mutual fund companies to color code the funds based on the risk they carried. This method used color boxes depending on the level of risk of the schemes. The concept was similar to that used by clothing or food processing industries (red dot for non-vegetarian ingredients and green for pure vegetarian ingredients).

With mutual funds, a blue box meant there was low risk on the principal. A yellow box meant medium risk and a brown box meant high risk. The fund house had to display these colored boxes on offer documents, scheme advertisements and common application forms.

Why the change?

The color system method didn't seem to serve a purpose, according to some distributors. The need for a better system was felt and the Riskometer was introduced. The color labels were still open to interpretation even though a description was provided along with the color label. The Riskometer states the level of risk more clearly.

How does a Riskometer look?

The Riskometer adds two more categories to the previous method. It looks like a speedometer and has the following five different levels:

1. Principal at low risk

2. Principal at moderately low risk

3. Principal at moderate risk

4. Principal at moderately high risk

5. Principal at high risk



Association of Mutual Funds of India (AMFI), the mutual fund industry's trade body, has formed a committee that will develop and issue the rules and guidelines to be followed in order to classify the level of risk a fund carries. The objective of the committee is to ensure that all fund houses label their schemes based on the best practice issued by AMFI. This will help to create a standardized classification.

So the next time you consider investing in a mutual fund, do go through the front page of the scheme related documents and the application forms as they carry the product labels. Contact us, (through the Query Form on the right hand side) to know more about investing in mutual funds.