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Understanding Mutual Fund Riskometer

SEBI has made it mandatory for all fund houses to display a riskometer depicting levels of risk
07 November 2022
    Blog

    Mutual Fund Risk-o-meter: A simple tool to understand Investment Risk

    When investing in mutual funds, returns often receive the most attention. However, every investment carries a certain level of risk and understanding that risk is crucial before making any decision. To help investors make more informed choices, the Securities and Exchange Board of India (SEBI) introduced the Mutual Fund scheme Risk-o-meter—a simple, visual tool that indicates the risk level of a scheme.

    Today, the Riskometer disclosure is mandatory for all mutual fund schemes and must be displayed at all such places wherever scheme name is mentioned. This standardised disclosure helps investors quickly understand the level of risk associated with a scheme.

    What is the Mutual Fund scheme Riskometer?

    The Riskometer is a visual indicator that shows the risk level of a mutual fund scheme in an easy-to-understand format. It helps investors better assess the risk profile of different schemes.

    Currently, Risk-o-meter has following six levels of risk for mutual funds with the given colour scheme, making the tool more granular and investor friendly.

    The six risk levels are:

    • Low risk
    • Low to Moderate risk
    • Moderate risk
    • Moderately High risk
    • High risk
    • Very High risk

    Each level reflects the potential volatility and uncertainty of the scheme’s underlying investments.

    How is the risk level determined?

    The risk level of a mutual fund scheme is calculated based on the characteristics of the securities in its portfolio. It is not assigned arbitrarily but determined using defined parameters.

    For equity schemes, factors considered include:

    • Market capitalisation
    • Volatility
    • Liquidity (impact cost)

    For debt schemes, the assessment is based on:

    • Credit risk (issuer quality)
    • Interest-rate risk (duration)
    • Liquidity risk

    Because the portfolio composition may change over time, fund houses to review the risk level every month. If there is any change in riskometer, investors of that particular scheme must be informed as per regulatory timelines and guidelines.

    Why does the Riskometer matters?

    The Riskometer offers several practical benefits:

    1. Quick understanding of risk

    It provides a simple visual snapshot, making it easier for investors to assess a scheme’s risk level at a glance.

    2. Better alignment with risk appetite

    Investors can select schemes that match their financial goals, time horizon, and tolerance for market fluctuations.

    3. Greater transparency

    Standardised disclosure across all schemes improves consistency and investor confidence.

    4. Support for balanced portfolios

    By comparing risk levels, investors can build diversified portfolios combining lower- and higher-risk schemes.

    5. Realistic return expectations

    Higher-risk schemes may offer higher return potential but also come with greater volatility. The Riskometer helps investors set appropriate expectations.

    How can investors use the Riskometer?

    While Riskometer is a useful starting point, it should be considered alongside factors such as investment goals, time horizon, and overall portfolio allocation.

    For example:

    • Short-term goals may be suited to lower to moderate-risk schemes
    • Long-term wealth-creation goals may justify higher-risk equity funds

    Conclusion

    Mutual Fund scheme Riskometer is a simple yet powerful investor-information tool. By clearly displaying the risk level of a scheme, it brings greater transparency and helps investors make more informed decisions.

    After all, successful investing is not just about chasing returns, it is about choosing the right level of risk for your financial journey.

    An Investor Education & Awareness Initiative by HSBC Mutual Fund

    Visit https://grp.hsbc/KYC w.r.t. one-time Know Your Customer (KYC) process, complaints redressal process including SEBI SCORES (https://www.scores.gov.in). Investors should only deal with Registered Mutual Funds, to be verified on SEBI website under Intermediaries/Market Infrastructure Institutions (https://www.sebi.gov.in/intermediaries.html). Investors may refer to the section on ‘Investor Education’ on the website of HSBC Mutual Fund for the details on all ‘Investor Education and Awareness Initiatives’ undertaken by HSBC Mutual Fund.

    Document intended for distribution in Indian jurisdiction only and not for outside India or to NRIs. HSBC MF will not be liable for any breach if accessed by anyone outside India. For more details, refer website.

    Mutual fund investments are subject to market risks, read all scheme related documents carefully.

    CL 3730

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