SEBI has modified the product labelling guidelines in mutual funds in which it has introduced another level to the risk-o-meter – ‘very high risk’ from January 1, 2020.
As the name suggests, risk-o-meter helps investors gauge the level of risk through a meter.
With this, 'Risk-o-meter' in mutual funds will have six levels. Earlier there were 5 levels to depict risk. Here are the risk levels according to the new guidelines:
i. Low Risk
ii. Low to Moderate Risk
iii. Moderate Risk
iv. Moderately High Risk
v. High Risk and
vi. Very High Risk
Another key change is introduction of formula to select risk level in Risk-o-meter. SEBI has given weightage to various risks like liquidity risk, credit risk and interest rate risk to calculate risk level of a debt scheme. Similarly, in equity funds, SEBI has assigned certain values to schemes depending on market capitalization, volatility and impact costs.
Currently, fund houses assign risk level of schemes at the time of NFO based on characteristics of the scheme. For instance, liquid funds and ultra-short term bond funds having average maturity of less than 90 days typically show ‘low risk’ on Risk-o-meter.
However, SEBI has asked fund houses to revise Risk-o-meter of their scheme on a monthly basis and disclose it on their website and AMFI.
In addition, fund houses will have to communicate changes in scheme’s risk-o-meter through email or SMS to unitholders.
