A riskometer is a pictorial depiction of the risk profile of a mutual fund scheme. It shows the level of risk associated with the principal amount invested in a mutual fund. The riskometer consists of 5 levels: low, moderately low, moderate, moderately high, and high.
In 2015, the Securities and Exchange Board of India (SEBI) made it mandatory for all mutual fund houses to display a riskometer for all of their mutual fund schemes to enable investors assess the amount of risk associated with mutual fund investments.
The below table gives a snapshot of risk profiles of some mutual fund categories:
|Low Risk||Moderately Low Risk||Moderate Risk||Moderately High Risk||High Risk|
|Liquid Funds||Short-duration Funds, Ultra Short-duration Funds||Fixed Maturity Plans (FMPs)||Large Cap Funds, Mid and Small Cap Funds, Balanced Funds||Sectoral Funds|
So, which risk profile is suitable for you?
You can understand which risk profile is suitable for you with the help of the below table:
|Risk Profile||Type of Investor|
|Low Risk||Investors willing to accept low returns for high safety of principal amount.|
|Moderately Low Risk||Investors willing to take a small amount of risk for potential returns.|
|Moderate Risk||Investors willing to accept a moderate level of risk for moderate returns.|
|Moderately High Risk||Investors willing to take relatively high risk for high returns.|
|High Risk||Investors willing to lose capital for significantly high returns.|
What Type of Risk Does the Riskometer Measure?
- Credit Risk: Risk that there will be defaults on the bonds/securities held by the fund.
- Interest Rate Risk: Risk of change in the value of the fund’s bonds/securities due to a change in the interest rates.
- Liquidity Risk: Risk of the fund manager being unable to honour redemptions due to illiquidity in the debt securities held by the fund.
You can read more about debt funds here.
- Market Risk: Risk of decline in the value of the fund in the event of downward trend in the stock market.
- Fund Manager Risk: Risk that the fund manager underperforms the stock market. For instance, the fund generates a 5% return while the stock market registers a gain of 10%.
You can read more about equity funds here.
What to do when you are at risk?
- Change asset class of fund: Move from equity funds to debt or balanced funds.
- Move to low-risk fund schemes within the same category: If you have invested in sectoral or thematic funds, move to large cap or multicap funds.
Diversification: Diversify your fund portfolio by adding funds which were not previously present. For instance, if you do not hold in any gold in the portfolio, you can allocate 5%-10% of the portfolio to gold.