Investing plays an important role in building wealth and achieving long-term financial goals. Every investment carries some level of risk, so understanding and managing that risk is essential before investing. To help investors make informed decisions, the Securities and Exchange Board of India (SEBI) has introduced tools that clearly explain investment risk. One such tool is the Riskometer. The mutual fund riskometer helps investors understand the level of risk associated with different mutual fund schemes, making it easier to choose investments that match their financial goals and risk appetite. This article explains the Riskometer, its importance, history, and how it helps assess investment risk.
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.
How does the Riskometer work?
The mutual fund Riskometer helps investors understand the risk level of a scheme. It places every scheme into one of six risk categories, with each level shown in a different colour for easy identification. The Riskometer makes it simpler to compare funds and choose one that matches your financial goals and risk appetite.
| Risk Level | Colour Code | Suitable For | Example Fund Categories |
|---|---|---|---|
| Low Risk | Irish Green | Conservative investors who want to protect their capital | Overnight funds, arbitrage funds |
| Low to Moderate Risk | Chartreuse | Investors with a medium to long-term investment horizon and a willingness to take limited risk | Ultra short duration funds, money market funds |
| Moderate Risk | Neon Yellow | Investors seeking better return potential with measured risk | Medium term funds, corporate bond funds, banking and PSU funds |
| Moderately High Risk | Caramel | Investors comfortable with higher market fluctuations | Equity savings funds, credit risk funds |
| High Risk | Dark Orange | Aggressive investors focused on higher growth | Gold and silver funds |
| Very High Risk | Red | Investors willing to accept significant risk for higher return potential | Equity funds, sectoral funds, dynamic asset allocation funds, international funds |
The mutual fund Riskometer is based on factors such as the type of underlying assets, market volatility, credit risk, and interest rate sensitivity. These factors help determine the overall risk level of a scheme.
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
Listed below are the riskometer levers, their colours and a few details about what they mean:
| 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. |
The Bajaj Broking website 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
Here are some risks involved in investing in different types of mutual funds:
- 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.
