Level Your Risk Appetite While Picking MF

As an investor, if you go through any mutual fund offer document in the last page you always find a quote: “Mutual Funds’ investments are subject to market risks, read all scheme related documents carefully.” 

When it comes to the risks, the Securities and Exchange Board of India (Sebi) last October revamped the whole historic ‘risk-o-meter’ which was based on colour-code that indicated the level of risk the category of mutual fund carries.

The colour code system was replaced with six levels of risk for mutual fund schemes that investors should be aware of. This six-level risks are low risk, moderately low risk, moderate risk, moderately high risk, high risk and very high risk.

Although it was announced in October 2020, it came into the force with effect from January 1, 2021 to all the existing schemes and all schemes to be launched thereafter.

The risk-o-meter should be evaluated on a monthly basis by the Asset Management Companies and are also expected to disclose the risk-o-meter along with portfolio disclosure of all their schemes on their respective websites as well.

For the investors, apart from knowing the risk of the mutual fund schemes, Sebi made it clear that scheme advertisements would be placed in a manner that is visible to the investors reading it. The new risk-o-meter rules for debt mutual fund schemes would be calculated based on the simple average of credit risk, interest rate risk and the liquidity risk by the fund houses.

As compared to the old method of colour code-based risk-o-meter, the new method allows investors to remain more cautious and well-informed about the risk level of their fund portfolios. The new rules by Sebi have proved to be more user friendly for the mutual fund investors while selecting the funds.

Although this is just one way of selecting the scheme as per your risk preference, as an investor you should also keep in mind that this alone should not be the only parameter while evaluating or selecting the scheme for your money. Various other factors like fund returns, fund houses investment strategies and the level of credibility they hold should also be factored in.