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Riskometer is a graphical representation of the risk a mutual fund carries. The graph is designed as per the Association of Mutual Funds in India (AMFI) guidelines.

It resembles the speedometer of a vehicle and displays 5-levels of risk, each with a respective colour.

History of Riskometer

The current version of the meter was introduced on 1st July 2015 by SEBI. The earlier model for product labelling, introduced in March 2013, demonstrated the risk involved with investing in a fund through three colours –

  • Blue – Low risk
  • Yellow – Medium risk
  • Brown – High risk.

However, this model was touted to be inadequate to classify the correct risk level of a mutual fund. Moreover, several funds would fall into the same risk category, thereby making it difficult to assess the difference between them.

The risk o meter prepared through new guidelines classifies risk into broader levels, making it easier for investors to choose a mutual fund as per their appetite.

Riskometer Risk Levels

The five levels of risks in a mutual fund riskometer are explained below in details –

Risk levelColourProducts under the categorySuitable for
LowGreenIncome funds, gilt funds, and fixed maturity plans with a maturity of less than 90 days come under this category as these carry the lowest risk.Those who are risk-averse and give priority to their investment.
Moderately lowLight greenShort and medium-term bonds with a maturity period of 91 days to 3 years come under this category. These also bear minimal risk.Those who prefer to take nominal risks but also prioritise the safety of their investment.
ModerateYellowHybrid debt-oriented funds, monthly investment plans (MIPs), and arbitrage funds come under this category as these are somewhat risky. These are ideal for medium- to long-term investing.Those who prefer to invest longer than short-term and would be ready to undertake a certain degree of risk for slightly lucrative returns.
Moderately highOrangeGold ETFs, index funds, diversified equity funds, and balanced equity-oriented funds with an equity exposure of upto 20% of the portfolio come under this category. These are usually large-cap funds with a long-term investment horizon.Those who opt long for long-term investment and are ready to be exposed to some degree of risk.
HighRedMicro-cap funds, international funds, thematic funds, and sectoral funds are classified under this category.These are ideal for high net worth individuals or aggressive investors who want to invest for long-term and don’t mind the risk of incurring losses.

Types of Risks in Mutual Fund Measured by Riskometer

Equity funds – 

  • Market risk – Risk arising from the poor performance of the market. It is also known as systematic risk and is primarily affected by macroeconomic factors.
  • Management risk – Risk that arises due to ineffective or underperforming management, specifically by a fund manager.

Debt funds –

  • Liquidity risk – Risk that creates difficulty in redeeming an investment without avoiding losses. It also arises when an investor is unable to sell the investment during an emergency.
  • Interest rate risk – Risk that might lower the price of security due to an increase in interest rate.
  • Credit risk – Risk that arises when the issuer of the security is unable to pay interest or redeem it at face value.

Other types of risk in mutual funds –

  • Rebalancing risk – Risk arising when fund managers rebalance a mutual fund. Such reinvestments can restrict growth opportunities and lead to losses.
  • Currency risk – Risk created to change in foreign exchange. If the exchange rate increases, it may reduce the returns from security.
  • Concentration risk – Risk that arises when investors concentrate on one single security or sector. This can lead to significant losses when the market is bearish.
  • Inflation risk – As the name suggests, it is the risk that arises due to inflation. If inflation rises, then the returns on investment might not be able to match that, leading to a loss or lower returns than anticipated.
  • Volatility risk – Risk that is created by fluctuations in a security’s net asset value (NAV). Such risk can be influenced by both microeconomic and macroeconomic factors.

It should be noted that equity fund, debt fund, liquid fund riskometer should not be the only factor to consider before investing. There are several other aspects that investors have to check before undertaking the decision to invest in mutual funds.

Some of these include expense ratio, performance against category, performance against the benchmark, the scheme’s assets under management (AUM), the experience of the fund manager, etc.

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Investors should also consider their objective of investment. Depending on that, they can opt for a short-term, medium-term, or long-term fund. Generally, medium-term and long-term mutual funds do not belong to the category of low-risk investment options.

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