While "mutual fund investments are subject to market risk", is a well-known phrase, very few of us are actually aware of the risks involved while investing in a particular fund. To help investors understand this crucial investing component, market regulator SEBI introduced an official riskometer in 2015, accompanying each fund.
With five risk levels – low, low to moderate, moderate, moderately high and high – the riskometer helps investors gauge the level of risk associated with a fund, or does it?
Category Riskometer and not Fund Riskometer
The current riskometer serves as a category riskometer and not a fund riskometer. In other words, it displays the risk associated with a particular fund category and not the fund itself.
SEBI has fixed risk associated with each category and the fund in that category is simply assigned that risk level. So, while the fund category may have low to moderate risk, the fund itself may carry high levels of risk, because of its underlying holdings.
A Welcome Change
The new mutual fund riskometer, set to come into force from January 1, 2021, aims to address this issue and eliminate it altogether. The new riskometer will give a risk level to each fund, based on the portfolio under its belt. This riskometer will give a true picture of the quantum of risk associated with a particular fund, helping investors make an informed choice.
The recent turn of events in the debt fund space, including the winding-up of six debt schemes, has shown that risks can stem from several unexpected quarters, including a lack of liquidity.
SEBI has elaborate guidelines on how AMCs will calculate the level of risk within individual schemes and has also added a new category of risk – very high.
That’s not all. Fund houses need to recalculate the risk level every month and inform investors via SMS and email regarding any change to the risk level. Investors should also be informed about the frequency of the change in risk levels in a particular year.
No More Turning Blind to Risks
Turning a blind eye to risk is often a key factor that contributes to not-so-great experiences in mutual fund investments. The impact of the debt crisis would have been softened to a large extent had investors been aware of the risk they are exposed to.
Strategies adopted to earn high returns also elevate risk levels significantly. With the new riskometer, investors would finally realise that risks and returns go hand-in-hand and are two sides of the same coin.
Summing it Up
While the popularity of mutual funds has soared over the years thanks to increasing financial literacy and campaigns like ‘Mutual Fund Sahi Hain’, SEBI’s new diktat would go a long way in making them more transparent and investor-friendly.
Understanding the actual risk you take with your mutual fund investment, helps you pick up a fund that aligns with your risk appetite and ensures you remain committed to your investment across market cycles, thus addressing your goals with ease.
(The author is Head, Edelweiss Wealth Management)
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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