Riskometer: Better tool to measure risk associated with MF

Arnav Pandya

Investors in mutual funds now have a new feature that will help them to assess risks associated with a particular fund that they are buying. This is in the form of a riskometer and this will replace the earlier colour coding that was present wherein there were three colours to mark the various schemes that the investors could look at. The exact nature of the riskometer and the manner in which this is used is more important because this will be a part of the overall evaluation exercise as far as the individual is concerned. Knowing how this works and what it means would help in giving clarity about its usage. Here is a closer look at the entire issue.

Change

The earlier position had the presence of three colours namely blue, yellow and brown which represented low, medium and high levels of risk respectively. This meant that the investor could look at the colour and then get an idea about the level of the risk that was present. This was not adequate to represent the entire range of risks that were present because it became difficult for the individual to actually fit some of the funds into a colour because this might not be exactly representative of the risk that might be present. Another problem was that several different types of funds would fall under the same colour which would mask the difference that was present within them.

This is now proposed to be addressed with the presence of a riskometer wherein there are five levels of risks that would be present. These would be low, moderately low, moderate, moderately high and high. This would provide more options for the mutual funds to actually classify the risk and paint a better picture of the whole situation which would go on to help the investor to recognise the right kind of risk that is present.

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Guidelines

There are also clear guidelines that have been issued by the Association of Mutual Funds in India (AMFI) in terms of how various funds would be classified under the different levels of risk. For example liquid and money market mutual funds along with ultra short term bond funds that have an average maturity of less than 90 days would be classified under the category of low. Short to medium term funds having a maturity between 91 days and 3 years would come under the category of moderately low. Income and gilt funds with a maturity of more than three years plus arbitrage funds and debt oriented hybrid funds with an exposure of equity upto 20 per cent of the portfolio would come under the moderate category. Diversified equity funds, balanced funds and index funds would come under the moderately high category while thematic and sector funds and international funds would be classified as high risk funds. This would help the investor to get a clear picture about the whole situation as there would be a specific reasoning behind the classification of a fund in a specific category.

Overall

There are several other things apart from the riskometer that the individual should look at and hence this should be just the starting point for the investor as they go about deciding which fund they consider investing into. The meter will give an overall idea of the risk but only when the actual portfolio of the fund and the manner in which the funds are managed is seen carefully would the real picture emerge for the individual and this will help them in choosing the appropriate fund. There is a need to broaden the horizons and look at all the relevant factors when the decision is being made as this would prove to be of real use. So the riskometer is just a part of the work that needs to be done while choosing a particular fund.