Mutual funds do bring smile on the faces of investors with substantially higher returns if they stay invested for a long period of time. But, there are risks too in the way of such returns. With risk, you could have cast your mind to the popular television ads that say, “Mutual fund investments are subject to market risk. Please read the offer document carefully before investing”. Risks can be of various types ranging from macro-economic risks to liquidity that you may know. Weak performance of the stock market can pull down the value of net asset value (NAV) of the fund you may have opted for. The poor performance can be attributable to the sudden policy changes by the government, triggering collapse in the market. But do you know the kind of risk that your mutual fund actually carry? If you do not know, we can help you get aware of the same and ensure you go high-five in your mutual fund investment.
Although you can find the information regarding the mutual fund in the offer document. But, the readability of the same may not be the greatest in the document. Thus, the Securities and Exchange Board of India (SEBI), the market regulator, from July 1, 2015, has made it necessary for all the mutual fund schemes to display the riskometer, which indicates the magnitude of risk involved in a specific mutual fund. The riskometer appears like a speedometer and involves various levels of risk such as
- Principal at low risk
- Principal at moderately low risk
- Principal at moderate risk
- Principal at moderately high risk
- Principal at high risk
The guidelines issued by the Association of Mutual Funds in India (AMFI), the mutual fund body, clearly states the classification of funds under varied levels of risk.
Liquid, money market and short-term mutual funds with maturity of less than 90 days-Low Risk
Short term and medium term funds with a maturity period of 91 days to 3 years- Moderately Low Risk
Income, gilt, debt hybrid funds (20% equity) with a maturity period of over three years-Moderate Risk
Diversified equity funds, index funds and balanced funds -Moderately High Risk
Thematic and sector funds-High Risk
Riskometer is an advanced version of the coloured product labels introduced in 2013. Mutual fund houses has to colour code the funds on the basis of risk carried by them. Colour boxes were used based on the level of risk in the funds. Blue, yellow and brown boxes meant low risk, medium risk and high risk on the principal, respectively. The fund houses were made to display such coloured boxes on application forms, offer documents and scheme advertisements. But, this system failed to impress most of the distributors who felt it was serving the purpose. And that led to the introduction of riskometer, which according to many states the risk levels very clearly. And like the earlier coloured product labels, fund houses will have to display riskometer on application forms, offer documents and scheme advertisements.