While being a popular investment tool, mutual fund schemes also come with their own set of risks. There are five basic risks that are likely to impact the mutual fund’s portfolio: market volatility, risk of inflation, uncertainty over the interest rate, financial risk, and credit danger, to list a few.
This is exactly the reason why the capital markets regulator Securities and Exchange Board of India (SEBI) has mandated Asset Management Companies (AMCs) or fund houses to indicate mutual funds risk next to their offerings.
The mutual funds risk-o-meter is a visual representation that indicates the five levels of risk associated with a particular mutual fund scheme. Typically, the five levels make up the risk-o-meter: low, substantially low, moderate, moderately high, and high.
This provides an investor with an overview of relevant information related to how mutual funds work and the volatility and uncertainty associated with a particular scheme.
The risk-o-meter is evaluated on a monthly basis in accordance with the performance of the stock market. The results are shared with investors with the portfolio disclosure on the website of an AMC or fund house, 10 days before the end of the month.
It is mandatory for AMCs to share the new mutual fund’s risk evaluation with the Association of Mutual Funds in India (AMFI) every month.
Investors can use a risk-o-meter as one of the criteria before opting for a particular mutual funds scheme. A risk-o-meter acts as a guideline for investors who look forward to evaluating the fund’s risk levels and determining whether they match their own.
It is crucial to note that while the risk-o-meter can provide an outlook of the risk level, it should not be the only factor to be considered when choosing a mutual fund scheme. In addition, to this, an investor should take into account several other factors, including the investment objective, time horizon, and past performance, etc.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.