Risk-o-meter is a pictorial depiction of the risk level in a mutual fund scheme. All asset management companies are legally obligated to show it in their scheme-related documents.
If you have invested in a mutual fund scheme, you may have noticed that your asset management company occasionally sends emails regarding risk-o-meter. That's because each fund must evaluate the risk-o-meter every month, and each AMC has a separate risk-o-meter.
One of the main factors to consider before buying a mutual fund is the risk level; the risk-o-meter helps assess that. As per the Securities and Exchange Board of India (Sebi), the fund houses must send the risk-o-meter "within 10 days from the close of each month," along with the portfolio on their respective websites and the Association of Mutual Funds in India (AMFI) portal. Also, they must disclose the scheme's risk levels as on March 31 every year and the number of times the Risk-o-meter has changed during a year.
What Is Risk-o-meter?
Risk-o-meter is a valuable tool for assessing the associated risk with a fund.
It is a pictograph, a half circle divided into six parts showing different levels of risk, from low to high, printed on the top of scheme-related documents. This simple speedometer-like picture gives investors an idea of the risk level of that particular scheme and helps them to make investment decisions accordingly. Currently, the risk-o-meter in the scheme-related documents has six risk levels, from low to very high risk.
The Risk-o-meter's six risk levels and the methodology to calculate them are clearly defined by Sebi. Mutual funds are required to assign the risk level to their scheme at the time of launch, following which, whenever there is a change, they are required to communicate it to the unit-holders of that particular scheme. All mutual fund houses must update it for all their schemes from the time of the new fund offer (NFO) and every month after that. Just below the risk-o-meter, the AMCs also clearly mention the risk in writing. For example, As of March 2023, the Bank of India Liquid Fund's risk-o-meter showed a low-to-moderate risk. Below the pictograph, 'Investors understand that their principal will be at low to moderate risk.'
Risk-o-meter is a simple way to compare the risk level of one scheme with the risk level of other schemes in the same category and the benchmark given with the scheme's risk-o-meter in the Scheme information documents (SIDs).
Background
In 2013, Sebi first introduced product labelling in mutual fund schemes through a colour code (Blue – low risk, Yellow – medium risk, and Brown – high risk) to protect investors from any misselling and give them an easy option to understand the risk involved in the scheme.
But in 2015, Sebi introduced the Risk-o-meter for investors' ease. It increased the risk levels from three to five (low, moderately low, moderate, moderately high, and high) to make it more comprehensive. Sebi fixed the risk level for each category, but fixed risk level was not helpful as different funds in the same type differed on risk level. Then in October 2020, it issued another circular with new guidelines to calculate the risk level and added one more level to the pictograph. These guidelines came into effect on January 1, 2021. You can see the monthly and yearly Risk-o-meter-related information on the mutual funds’ website or the AMFI portal.