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.
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.
Hop on to Bajaj Finserv platform today. It provides all the importance information at a glance, so that you can start investing in your desired mutual finds according to your risk tolerance today!
