Mutual Fund Riskometer- Types and Risk Levels

Investing in mutual funds has become one of the most preferred ways for Indians to build wealth, with over ₹66.93 trillion in Assets Under Management (AUM) as of December, 2024, according to AMFI (Association of Mutual Funds in India), which is more than a 6-fold increase in the last decade. However, with better potential for returns comes an equally important factor-risk.

Despite the growing popularity of mutual funds, many retail investors believe they don’t fully understand the risks associated with their investments. This lack of clarity sometimes keeps potential investors on the sidelines. Funds with high returns often come with equally high / very high risk, and balancing these elements requires informed decision-making.

This is where the Mutual Fund Riskometer becomes an essential tool. By visually representing the risk levels of different mutual fund schemes, the Riskometer simplifies complex financial data into an easy-to-understand format. Whether you're a seasoned investor or someone just looking to begin, the Riskometer helps you to understand scheme risk category.

What is a Mutual Fund Riskometer?

To enable investors to make an informed decision regarding their investments, a pictorial representation of the risk to the principal invested in a mutual fund product is depicted using a ‘Riskometer’. The pictometer will categorize the risk in the scheme at one of six levels of risk, as shown in the picture below.

Think of it as a speedometer on your car dashboard but for risk levels. It ranges from Low to Very High and helps investors understand how much risk they are taking by investing in a specific mutual fund.

Risk-o-meter shall have the following six levels of risk for mutual fund schemes -

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

The mutual fund has to calculate the risk value of each scheme based on the parameters as prescribed in the SEBI Regulations. This must be depicted on the risk-o-meter. If there is any change in the risk level, then this has to be conveyed through a Notice cum addendum and email or SMS to the unitholders. The risk-o-meter has to be evaluated on a monthly basis.

This simple tool ensures transparency and helps investors match their risk appetite with suitable mutual fund options.

Understanding the Six Risk Levels in the Riskometer

The Mutual Fund Riskometer categorizes funds into six distinct risk levels, providing investors with a clear understanding of the scheme risk. Each category serves as a means to understand and evaluate whether a fund aligns with an investor's financial goals and risk appetite.

1. Low Risk

Funds in this category are considered the least risky due to their underlying securities, making them suitable for individuals seeking a degree of capital protection.

2. Low to Moderate Risk

Designed for investors open to taking limited risks for moderate returns over a medium to long time horizon.

3. Moderate Risk

Suitable for investors aiming to diversify their portfolio while taking on some risk.

4. Moderately High Risk

These funds involve a higher level of risk and are suited for investors with a moderately aggressive risk profile, willing to accept greater volatility for the prospect of achieving returns.

5. High Risk

These funds are best suited for those willing to undertake high risks in pursuit of returns.

6. Very High Risk

These are the very high-risk funds. While they have the potential for high risk adjusted returns, they are suited only for investors who can tolerate market fluctuations.

Riskometer: Your Investment Compass

Whether you’re a conservative investor or an aggressive risk-taker, the Riskometer explains you the risks before investing. Before investing in any mutual fund scheme, always check its Riskometer category. Understanding where your fund stands on the risk scale will help you make informed decisions. Invest wisely, stay informed, and let the Riskometer guide you toward your financial goals!

Above article is authored by Quantum.

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