A riskometer is a graphic tool that shows the risk level of a mutual fund. Introduced by the Securities and Exchange Board of India (SEBI) and maintained by the Association of Mutual Funds in India (AMFI), the riskometer resembles a speedometer with a pointer indicating risk from low to very high. It helps investors quickly grasp a fund’s risk profile before investing.

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Why the Riskometer Was Introduced

Before 2015, mutual funds were broadly classified as equity or debt. This simple categorisation didn’t reflect differences in volatility within each type. To give investors a clearer picture, SEBI launched the riskometer in 2015, with five risk levels. In 2020, SEBIupdated the tool to six levels and adopted a meter format. The updated riskometer considers factors like the fund’s asset mix, credit quality, concentration and investment strategy.

Riskometer’s Six Risk Levels

The six levels indicate how much volatility or potential loss you might face:

Risk Level

Description & Typical Funds

Colour Code*

Low

Invests mainly in money‑market securities, gilt funds and fixed‑maturity plans. Suitable for conservative investors seeking steady income.

Dark green

Moderately Low

Holds high‑grade bonds with short to medium maturities. Suits investors willing to take slightly more risk for modest growth.

Light green

Moderate

Includes arbitrage funds, money‑market funds and hybrid funds with debt dominance. Designed for semi‑conservative investors seeking higher returns with controlled risk.

Yellow

Moderately High

Covers Gold ETFs, index funds, diversified equity funds and balanced equity‑oriented funds. Best for long‑term investors ready to accept some volatility for higher growth.

Orange

High

Focuses on micro‑cap, international, sectoral and thematic funds. Suitable for investors comfortable with significant risk to achieve greater returns.

Red

Very High

Invests largely in small‑cap and mid‑cap stocks. Meant for those with an aggressive risk appetite who can tolerate substantial fluctuations for long‑term gains.

Dark red

*Colour codes may vary by provider but generally follow a progression from green (low risk) to dark red (very high risk).

Types of Risks Considered

The riskometer evaluates several risks based on the fund’s composition:

Market Risk: Fluctuations in stockprices affect equity‑heavy funds. A broad market downturn can cause equity funds to decline.
Management Risk: Poor decisions by the fund manager can reduce returns even in diversified portfolios.
Liquidity Risk: In debt funds, this is the difficulty of selling fund units when trading volumes are low.
Interest Rate Risk: Debt funds with longer maturities may lose value when interest rates rise.
Credit Risk: The possibility that a bond issuer defaults on repayments, affecting debt funds.

By weighing these factors, the riskometer helps investors gauge overall volatility and potential downside.

How to Use the Riskometer

Match risk with your goal: If you have a short‑term goal or low risk tolerance, choose funds in the low to moderate range. For long‑term wealth building, higher risk categories may be acceptable.
Look beyond the label: Two funds at the same risk level can differ in strategy, sector and credit quality. Read the scheme’s factsheet or offer document for details.
Combine with other metrics: Consider past performance, expense ratios, portfolio holdings and the fund manager’s track record along with the riskometer.
Stay updated: Mutual funds must update their riskometer monthly. Check the latest rating to ensure you’re still comfortable with the fund’s risk level.

Advantages and Limitations

Advantages

Simple visual cue: Quickly conveys a fund’s risk category.
Standardised: Applies to all mutual funds regulated by SEBI, making comparisons easier.
Investor awareness: Encourages investors to consider risk, not just returns.

Limitations

No guarantee: A lower risk category does not guarantee safety; market conditions can change.
Doesn’t quantify return: The riskometer doesn’t show potential returns or how much you might gain.

Monthly updates: Risk levels can change, so you need to monitor them regularly.

Conclusion

The riskometer is a valuable tool for gauging mutual fund risk. By understanding the six risk levels and the types of risk they represent, you can choose funds that align with your financial goals and comfort with volatility. Remember, however, that the riskometer is just one piece of the puzzle. Combine it with thorough research and periodic reviews to build a portfolio that balances risk and return.

Frequently Asked Questions (FAQs)

What does the riskometer measure?

It measures the overall volatility and potential downside risk of a mutual fund based on its asset mix, credit quality and investment strategy.

Why are there six risk levels?

SEBI expanded the categories in 2020 to provide more precise gradations of risk and to better match the diverse range of mutual fund strategies.

Is a fund rated ‘Low’ completely safe?

No investment is risk‑free. ‘Low’ indicates lower volatility compared to other funds, but market fluctuations and interest rate changes can still affect returns.

Can a fund’s risk category change?

Yes. Mutual funds reassess their portfolios monthly. If a fund changes its composition, its risk level can shift higher or lower.

Does the riskometer indicate returns?

No. It only categorises risk. To assess potential returns, look at historical performance, fund objectives and other metrics.

How does the riskometer help new investors?

It offers a quick snapshot of a fund’s risk level, helping beginners align choices with their tolerance and investment horizon without analysing detailed portfolios.

Are riskometers mandatory?

Yes. Mutual fund companies regulated by SEBI must display the current riskometer rating in marketing materials and monthly factsheets.

Does the riskometer apply to international funds?

Yes, if the funds are offered by SEBI‑registered entities in India. The risk from foreign markets is reflected in the fund’s overall risk rating.

Should I avoid high or very high risk funds?

It depends on your goals and risk tolerance. Aggressive investors with long horizons might use high‑risk funds for potential higher returns, while conservative investors may prefer moderate or low risk funds.

What other tools complement the riskometer?

Fund fact sheets, portfolio disclosures, performance charts, and third‑party research reports help investors assess whether a fund suits their objectives.

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