What is Riskometer in Mutual Funds? Meaning, Working & Risk Levels

A few years ago, Rajesh, an IT professional in Mumbai, decided to start investing in mutual funds. Excited by the prospect of wealth creation, he invested in an aggressive equity fund without fully understanding the associated risks. A market downturn wiped out a significant portion of his investments, leaving him in distress. Had he been aware of the mutual fund riskometer, he might have chosen a fund better suited to his risk appetite. The riskometer in mutual fund investing serves as an essential tool for investors like Rajesh, helping them assess the mutual funds risk level before committing their hard-earned money.

How does a riskometer work?

As a new investor, you may wonder about the function of a riskometer in mutual fund. Here is everything you need to know about the instrument, and its efficient application.

The mutual fund riskometer is a standardised risk measurement tool introduced by the Securities and Exchange Board of India (SEBI). It helps investors understand the mutual funds risk factors associated with different schemes. All mutual funds prominently displays this riskometer in their documents to ensure transparency. It classifies investments into six risk categories, ranging from low to very high, enabling investors to align their investments with their risk tolerance.

Riskometer colour codes and levels

The riskometer in mutual fund investing follows a colour-coded classification that visually represents the risk associated with each fund. This standardisation ensures that investors, whether experienced or beginners, can easily interpret the risk level before making investment decisions.

The six risk levels are:

1. Low risk (/dark Green) – Ideal for conservative investors looking for stable returns with minimal risk.
2. Low to moderate risk (Light Green) – Suitable for those seeking slightly higher returns while maintaining low risk.
3. Moderate risk (Yellow) – Best for investors comfortable with moderate market fluctuations.
4. Moderately high risk (Coffee Brown ) – Attracts investors willing to take on increased volatility for potentially higher returns.
5. High risk (Orange ) – Designed for aggressive investors focusing on equities.
6. Very high risk ( Red) – Meant for those seeking maximum returns but willing to endure significant risk.

Various risk levels

Each level of the mutual funds risk level scale is crucial in helping investors make informed choices:

• Low risk: Funds in this category invest in fixed-income instruments such as government bonds, treasury bills, and fixed deposits. They are designed for conservative investors who prioritise capital protection and stable returns. These funds generally have minimal exposure to equities, making them less volatile and an ideal choice for retirees or individuals with a low-risk appetite.
• Low to moderate risk: Funds classified under this level include ultra-short-duration debt funds, liquid funds, and corporate bond funds. They offer slightly higher returns than low-risk funds while maintaining relative stability. These funds are suitable for investors with short to medium-term financial goals who are comfortable with a small degree of market risk.
• Moderate risk: This category includes dynamic bond funds, hybrid funds, and balanced advantage funds. They balance risk and return by investing in a mix of equities and debt instruments. Investors in this category should be prepared for some market fluctuations while benefiting from potential capital appreciation. These funds are well-suited for medium to long-term investors looking for a diversified approach.
• Moderately high risk: Investors in this category must be comfortable with market volatility, as these funds hold a significant portion of equity investments. Hybrid funds, aggressive debt funds, and equity-oriented balanced funds fall under this bracket. While these funds offer the potential for higher returns, they also expose investors to greater market risks. They are ideal for individuals with a long-term perspective and the ability to withstand short-term fluctuations.
• High risk: These funds invest predominantly in equities, including large-cap, mid-cap, and small-cap stocks. They are suitable for long-term investors with a high-risk appetite who can tolerate significant market swings. The potential for high returns comes with increased volatility, making these funds appropriate for aggressive investors seeking capital growth over extended periods.
• Very high risk: Funds in this category include sectoral funds, thematic funds, and international equity funds. They focus on niche sectors such as technology, healthcare, or emerging markets, which makes them highly volatile. While they offer the highest potential returns, they also carry the greatest risk. These funds are best suited for experienced investors with a deep understanding of market trends and a strong tolerance for fluctuations

Why Is the riskometer important?

The mutual fund riskometer is a valuable tool for investors. It ensures that individuals can gauge whether a scheme’s risk aligns with their financial goals and risk tolerance. Some key benefits of the riskometer include:

• Informed decision-making: Investors can select funds that match their risk appetite rather than making impulsive choices.
• Regulatory transparency: SEBI mandates that all mutual funds display the riskometer in mutual fund scheme documents, ensuring investor awareness.
• Portfolio diversification: By understanding different risk levels, investors can allocate their funds strategically across various risk categories.
• Investment suitability: The riskometer helps investors assess whether mutual funds risk high or low, allowing them to avoid unnecessary exposure to volatility.
• SIP planning: Those using an SIP calculator can align their systematic investment plans with appropriate risk levels, ensuring better financial planning.

Conclusion

Understanding the mutual fund riskometer is crucial for every investor, from beginners to seasoned market participants. The riskometer in mutual fund investing provides clarity on mutual funds risk factors, helping investors determine whether mutual funds risk high or low for their specific needs. By leveraging tools like the SIP calculator, investors can make informed decisions, ensuring their financial goals are met with minimal surprises. Just as Rajesh learned the importance of assessing risk, every investor should use the riskometer to navigate the dynamic world of mutual funds wisely.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms  

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