The Indian capital market regulator, SEBI, proposed a risk management framework for evaluating the risk level of commodities, gold and gold-related instruments, in which mutual funds are permitted to invest on a risk-o-meter.
SEBI has decided that investment in commodities by mutual fund schemes will be assigned a risk value corresponding to the annualised volatility of the said commodity’s price.
The annualised volatility will be computed quarterly based on the past 15 years’ prices of the benchmark index of the said commodity.
The annualised volatility risk value on a risk-o-meter less than 10% will have a risk score of “3” (moderate). Annualised volatility in the range of 10-15% will have a risk score of “4”(moderately high), 15-20% at “5” (high), and greater than 20% score will be at “6” (very high).
For example, if the price of gold has annualised volatility of 18% based on the price of gold over the past 15 years, then gold and gold-related instruments will have a risk value of 5 (high) on the risk-o-meter.
In October 2020, the regulator had said investment in gold and gold-related instruments would be valued at “4” by mutual fund schemes from a risk perspective.
As per the circular issued by SEBI, this new framework will come into force with immediate effect.
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