What is the Risk-o-Meter in Mutual Funds? SEBI classification Explained

Assessing risk is an important part in choosing a mutual fund. Without a clarity on risk, it may become difficult to compare options or decide which fund fits your needs. To address this, the Securities and Exchange Board of India (SEBI) revised the product-labelling framework for mutual fund schemes through its Risk-o-meter.

The risk-o-meter in mutual funds gives an indicative outlook where a fund stands on the spectrum of risk.

What is a Risk-o-Meter in Mutual Funds?

A risk-o-meter is a standardized mutual fund risk evaluation framework that aims to show the potential level of risk in a mutual fund scheme. It places each fund on a fixed, SEBI-mandated scale, ranging from low risk to very high risk. SEBI revised the product-labelling framework for mutual fund schemes through its risk-o-meter to create a uniform way of showing risk across all mutual funds in India. This ensures that investors can compare different funds using the same scale.

Risk Levels in the Risk-o-Meter

The risk-o-meter classifies mutual funds into six levels - Low, Low to Moderate, Moderate, Moderately High, High, and Very High. Each level reflects the degree of risk based on the fund’s investments.

How the Risk-o-meter Measures Risk in Mutual Funds

The risk level in risk-o-meter is determined using the below key factors: 

1. Asset allocation

Funds with higher exposure to equities are placed in higher risk categories. Funds that invest mainly in debt or short-term instruments fall in lower risk categories. That said, funds primarily investing in the equity market may have the potential to provide higher returns compared to funds investing primarily in debt instruments

2. Credit quality (for debt funds)

Debt funds are assessed based on the quality of the bonds they hold. Higher-rated securities indicate potentially lower risk, while lower-rated securities indicate higher risk.

3. Interest rate sensitivity

Debt funds with longer maturity periods may be more sensitive to interest rate changes and may carry higher risk compared to short-duration funds.

4. Market exposure

Funds investing in broader or stable segments may carry relatively lower risk than those focused on specific sectors or smaller companies.

What a Risk-o-Meter Does Not Show

The risk-o-meter gives a basic view of risk, but it does not cover every aspect of a mutual fund’s risk.

• Funds in the same risk category can behave differently based on portfolio strategy and stock selection
• It does not show how much a fund’s returns can fluctuate or how deep the losses can be
• It gives only a limited view of the underlying portfolio and investment quality
• The risk level is not linked to your investment time frame
• Since the risk-o-meter is reviewed monthly, changes may reflect in the next monthly disclosure
• A “Low Risk” label does not guarantee returns or protection against losses

Where to Find the Risk-o-Meter?

The risk-o-meter is shown in key mutual fund documents. You can find it in:

• Scheme Information Document (SID)
• Key Information Memorandum (KIM)
• Monthly factsheets
• AMC, AMFI websites and mutual fund platforms

Can the Risk-o-meter Change Over Time?

Yes, the risk-o-meter can change. Mutual funds review their portfolios regularly. If there is a change in the type of assets or their risk profile, the risk level may also change. This is why it is useful to check the risk-o-meter from time to time, especially if you already hold units in the fund.

Risk-o-meter and Other Risk Indicators in Mutual Funds

The risk-o-meter gives a broader classification, while these indicators provide a more detailed view of how a fund reacts to market changes.