What Is Riskometer in Mutual Funds

Everything you need to know about Riskometer. Start making informed decisions today and mitigate your risks effectively.
EXPLORE FUNDS
Riskometer
EXPLORE FUNDS
4 mins
16 Feb 2024

Investing is an essential aspect of wealth creation and financial planning. However, investing always involves a certain degree of risk, understanding and managing that risk is crucial for achieving one's financial goals. To aid investors in making informed decisions, the Securities and Exchange Board of India (SEBI) has introduced various tools and indicators, one of which is the "Riskometer." In this article, we will delve into the world of riskometer in mutual fund, its history, significance, and its application in evaluating investment risks.

What is riskometer?

The riskometer is a visual tool designed to help investors assess the level of risk associated with a mutual fund. It provides a simple and standardised way to understand the potential risk profile of a particular mutual fund. Riskometer typically displays six risk levels on a scale, allowing investors to make more informed decisions based on their risk tolerance and investment objectives.

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History of riskometer

Risk-o-meter was introduced by SEBI in 2013, and it was demanded that all mutual fund companies show a riskometer for every mutual fund. Since then it had been amended twice in 2015 and later in 2020. AMFI (Association of Mutual Funds in India) gave clear rules about how to rank the funds in different risk levels. The Riskometer looks like a car speedometer and is a quick way to see the risk of different mutual funds with five levels.

The riskometer is designed to be more accurate and informative than the old risk classification system. It takes into account a number of factors to determine the risk level of a mutual fund, including the type of assets it invests in, the volatility of those assets, and the fund's investment strategy.

Riskometer risk levels explained

Riskometer Level

Colour

Description

Low

Light Green

The risk of losing money is very low. The fund is likely to generate stable returns over the long term.

Low to Moderate

Green

The risk of losing money is low. The fund is likely to generate moderate returns over the long term.

Moderate

Yellow

The risk of losing money is moderate. The fund is likely to generate balanced returns over the long term.

Moderately high

Orange

The risk of losing money is high. The fund is likely to generate high returns over the long term, but there is a greater chance of losing money.

High

Red

The risk of losing money is quite high. The fund is likely to generate very high returns over the long term, but there is a very high chance of losing money.

Very High

Maroon

The risk of losing money is very high. These funds are suitable for investors with long term investment vision.


Bajaj Finserv platform shows the riskometer associated with each fund and other important information clearly for an investor. This helps the investor choose the right mutual funds to invest their hard earned money in.

Types of Risks in Mutual Fund Measured by Riskometer

  • Equity funds: Generally, have a moderately high to very high-risk profile due to their exposure to the stock market.
  • Debt funds: Tend to have a lower risk profile compared to equity funds, but risk can vary based on the type of debt instruments they invest in.
  • Hybrid funds: Blend equity and debt components, resulting in moderate risk levels.
  • Sectoral funds: Can have a very high-risk profile due to concentrated exposure to specific sectors.
  • Liquid funds: Typically have a low-risk profile due to investments in short-term debt instruments.

Other types of risk in mutual funds

  • Rebalance Risk: This risk arises when the fund manager needs to rebalance the portfolio, potentially incurring transaction costs and affecting returns.
  • Currency Risk: Currency risk occurs when investments are made in foreign assets, and fluctuations in exchange rates can impact returns when converting back to the base currency.
  • Concentration Risk: Concentration risk is the danger of having a large portion of the fund's assets invested in a single security or sector, which can lead to significant losses if that asset or sector underperforms.
  • Inflation Risk: Inflation risk is the potential loss of purchasing power over time due to the eroding effect of inflation on the real value of investments.
  • Volatility Risk: Volatility risk refers to the possibility of abrupt price fluctuations in the fund's underlying assets, which can lead to both gains and losses for investors.

Riskometer profiles for investors

Investors should consider their age, financial goals, and risk tolerance when choosing mutual fund investments.

  • Conservative investors: Likely to opt for low to moderately low-risk products, prioritising capital preservation over high returns.
  • Moderate investors: Comfortable with moderate risk products that offer a balance between capital appreciation and stability.
  • Aggressive investors: Willing to take on high or very high-risk products to potentially achieve higher returns, understanding the associated volatility.

Note for investors

Riskometer has become an indispensable tool for investors in assessing the risk levels of mutual fund schemes. Its standardised approach provides clarity and transparency, enabling investors to make more informed investment decisions, but it is not the only factor that investors should consider when choosing mutual funds. Investors should also consider other factors like the fund's track record, fees, and expenses.

It is important to remember that past performance is not a guarantee of future results. By understanding their own risk tolerance and the risk profiles of different investments, investors can build a well-balanced portfolio that aligns with their financial objectives.

Conclusion

The Riskometer serves as a valuable tool for investors in mutual funds, offering insights into the risk associated with different fund categories. Understanding the Riskometer ratings enables investors to make informed decisions aligned with their risk tolerance and investment objectives. By leveraging this tool effectively, investors can build diversified portfolios that strike a balance between risk and potential returns. Ultimately, incorporating the Riskometer into investment strategies empowers investors to navigate the dynamic landscape of mutual funds with greater confidence and clarity, fostering long-term financial success.

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Frequently Asked Questions

How is Riskometer calculated?

The Riskometer, used in India, assesses the risk level of mutual funds by considering factors such as historical volatility, asset allocation, and underlying securities. It categorises funds on a scale ranging from low to high risk, helping investors make informed choices.

Is it safe to invest in very high-risk mutual funds?

Investing in very high-risk mutual funds can yield potentially higher returns, but it comes with significant volatility and potential for losses. It's suitable for investors with a high-risk tolerance and a long-term investment horizon, but not advisable for those seeking safety or stability.

Are low-risk mutual funds safe?

Low-risk mutual funds typically invest in assets like government securities or high-quality bonds. While they offer stability and lower risk of loss, returns are generally modest. They are considered safe for conservative investors looking to preserve capital and earn modest income.

How do you measure risk in mutual funds?

Risk in mutual funds is typically measured by analysing factors like volatility, historical performance, and the fund's investment objective. Understanding these metrics helps investors gauge the level of uncertainty associated with potential returns.

What is risk score in mutual fund?

The risk score in mutual funds represents the degree of volatility and potential losses associated with a particular fund. It is calculated based on factors such as the fund's asset allocation, historical performance, and market conditions, providing investors with insights into the fund's risk profile.

How do you use a Riskometer?

A Riskometer is a graphical representation of the risk level associated with a mutual fund scheme. Investors can use the Riskometer to assess the fund's risk profile and determine its suitability for their investment goals and risk tolerance. The Riskometer typically ranges from low risk to high risk, helping investors make informed decisions.

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Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083). BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform. BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform. Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing