Mutual Fund Riskometer Explained: Meaning, Risk Levels, and How to Read It

SEBI’s mutual fund Riskometer helps investors understand the risk associated with a scheme through six levels, ranging from Low to Very High. The rating is based on the securities held by the scheme and is reviewed monthly. Investors can use it to check whether a fund’s risk level matches their risk appetite and investment goals. 

When investing in mutual funds, investors often focus on returns. But understanding the risks involved is equally important before choosing a scheme.

To make this easier, SEBI introduced the Riskometer in mutual funds. This tool is designed to display the risk level of an MF scheme at a glance. However, even after a decade of mandating it, many investors are still unclear about mutual fund riskometers, what their levels signify, and how to read them. This guide simplifies all this. 

A mutual fund Riskometer is a SEBI-mandated visual tool that displays the risk level a mutual fund scheme carries. It is designed like a car’s speedometer, with a needle pointing to one of six levels - Low to Very High. This helps investors check the risk to their invested amount before choosing a scheme.

Riskometer was first introduced with 5 risk categories as a mandatory requirement. SEBI then revised its structure & the final, updated six-level structure came into effect by adding the ‘Very High’ category.

SEBI has laid down certain rules to ensure investors can easily check the mutual funds' risk levels and stay informed about any changes. These include:

1. Mandatory Display: AMCs must display the mutual fund Riskometer prominently in the following places:

• Front page of the NFO application form, SID and KIM.
• Common application forms, alongside scheme details.
• Close to the scheme name, where it is clearly visible.
• Scheme advertisements and promotional materials, as applicable.

2. Notification of Risk Changes: If the Riskometer rating changes, the AMC must notify investors by email or SMS and issue a communication by way of addendum on a monthly basis.
3. Monthly Risk Reviews: AMCs must assess each scheme's risk level every month, and the updated Riskometer (with portfolio details) has to be published on their own websites within 10 calendar days of month-end.
4. Annual Risk Disclosure: AMCs must publish each scheme's risk level as of March 31st and disclose how many times it changed during the year. This information must be available on AMC website.

As mentioned earlier, SEBI revised the mutual fund Riskometer with a sixth risk category. This new riskometer is as under. 

Here’s a detailed guide on the six risk levels in a mutual fund riskometer, how they are colour-coded, and what they mean:

Source: SEBI's Riskometer framework

Disclaimer: The mutual fund Riskometer indicates the level of risk to your principal. Even a low-risk rating does not guarantee any form of return and capital protection.

Now, how is the risk level of any particular fund scheme calculated? It is calculated on the basis of the securities in its portfolio. SEBI's circular SEBI/HO/IMD/DF3/CIR/P/2020/197, Annexure A, lays down the methodology AMCs must follow to assess the different types of risk in mutual funds.

Each security is given a risk value based on defined parameters. These values are then used to calculate the scheme's overall Riskometer level.

Here's a quick overview of the parameters used:

• Debt Securities: Credit risk, liquidity risk, and interest-rate risk.
• Equity Securities: Market capitalisation, price volatility, and impact cost (a measure of liquidity).

Note: SEBI specifies detailed criteria and risk values for each parameter. Separate rules also apply to other investments, including equity derivatives, index and stock futures, REITs, InvITs, gold and foreign securities. Refer to Annexure A of the SEBI circular for the complete calculation methodology.

Reading a mutual fund Riskometer is simple. Look at where the needle points on the six-level scale. For instance, if the needle is pointing at ‘Low’, it means the scheme carries relatively low risk. Remember, the higher the level, the greater the risk to your invested amount.

Next, check whether the indicated risk level suits your financial situation. Consider:

• Risk Appetite: Are you comfortable with the level of risk shown?
• Investment Horizon: Do you have enough time to manage potential market fluctuations?
• Financial Goals: Does the risk level of the scheme align with your investment objective?
• Risk-Bearing Capacity: Can you afford potential losses without affecting your financial needs?
• Existing Portfolio: Will adding this scheme increase your overall portfolio risk?

Remember, the Riskometer shows how risky a scheme is, not whether it is suitable for you. That depends on your goals, risk appetite, and investment timeline.

The mutual fund Riskometer makes it easier to understand a specific scheme’s risk level before investing. It is mandatory for AMCs to display it and update it monthly for the changes, if any, so investors can stay informed about changes in risk.

Always check the Riskometer before investing instead of relying only on past returns. Compare the displayed risk level with your own risk tolerance and review it regularly to ensure it still suits your needs.

1. What is a mutual fund Riskometer and how should investors read it?

A Mutual fund Riskometer is simply a visual indicator that displays the amount of risk exposure of a fund scheme. To read it, check where the needle points on the six-level scale. A higher level indicates greater risk to your invested amount.

2. What are the different mutual funds risk level categories shown on the Riskometer?

The mutual fund Riskometer has six risk levels:

• Low
• Low to Moderate
• Moderate
• Moderately High
• High
• Very High

These categories indicate the level of risk to your investment. Even a Low-risk rating does not guarantee any form of return and capital protection.

3. Is a Riskometer in mutual funds mandatory for all schemes?

Yes, Riskometers are indeed mandatory. As per SEBI, all AMCs must display it for their schemes and review the ratings monthly. Updated risk levels have to be published on AMC websites so that investors can track changes.

4. What are the types of risk in mutual funds and how do they map to Riskometer levels?

Types of risks in mutual funds can vary depending on the type of scheme in question. For instance, equity funds may have market capitalisation and volatility risks, while debt funds have credit and interest rate risks. 

These risk factors are mapped onto mutual fund riskometer levels as per SEBI’s stated methodology where every underlying security is allocated a value depending on the risk parameter. The exact methodology and guidelines are outlined in SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/197 Annexure A.

5. How can investors use risk levels to match a mutual fund scheme to their risk profile?

You may start by checking the scheme's Riskometer rating. Then compare it with your risk appetite, investment horizon, financial goals and capacity to bear losses.

For example, if you have a low-risk appetite, a Very High-risk scheme may not suit your needs. Also, review the Riskometer periodically, as its rating can change.

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