The mutual fund riskometer is a dial that appears on every scheme’s documents and factsheet. It shows how risky the scheme is, using a scale from six levels- to Very High. The Securities and Exchange Board of India or SEBI makes this mandatory. Each month the fund house checks the scheme’s holdings. Updates the risk rating. This means the rating changes with the portfolio.
Looking at the riskometer before investing helps you match the scheme with your comfort level for loss and how long you can keep your money invested. The dial reflects the risk to your principal based on what the fund owns. It does not predict returns. So it should be seen as a check, not a final decision.
Here are the six risk levels and what they mean:
- Low: little risk to your principal over the intended period. These schemes are usually funds.
- Low to Moderate: Some risk due to interest rate changes or credit quality. Examples include liquid, short and money market funds.
- Moderate: changes in value. This includes short and medium duration debt funds and conservative hybrid funds.
- Moderately High: Larger swings in value due to a mix of debt and equity or longer duration bonds. Some hybrid funds and longer duration debt funds fall here.
- High: Considerable fluctuations, mostly from equity exposure. Some equity-oriented and hybrid funds are at this level.
- Very High: The biggest swings and possible large losses. Many equity funds, sectoral funds and overseas funds are in this category.
The dial shifts from green at the end to red at the high end. SEBI introduced colors for this in December 2024.
How is the rating determined?
It depends on the type of scheme:
- Equity funds look at the volatility of the stocks held company size and how easily they can be sold.
- Debt funds consider credit risk, interest rate risk and liquidity risk of the bonds.
- Hybrid funds look at the mix of equities and debt in the portfolio.
Each holding gets a risk score. These scores are combined based on how much of the portfolio each holding makes up. Because the rating comes from the portfolio the same category of fund can have different ratings.. The rating for a single scheme can change every month.
Here’s how to read the riskometer step by step:
- Check the scheme’s level
This tells you how risky the current portfolio is. It’s the number to focus on.
- Look at the benchmark’s riskometer
This shows how risky the market segment is that the scheme uses for comparison. Comparing the two dials helps you see if the scheme is taking less risk than its benchmark.
- Check the date of the reading
The rating is updated monthly. An old reading might not reflect the situation. So always check the date.
- Consider the time the money can stay invested
Higher-risk schemes need investment horizons to recover from drops. A High risk fund might be fine for a 10-year goal but not for a 1-year goal.
- Look at the risk class for debt schemes
This separates interest rate risk from credit risk. The riskometer combines them into one dial. The potential risk class shows them separately.
Now let’s compare the riskometer and the potential risk class matrix:
| Feature | Riskometer | Potential Risk Class (PRC) Matrix |
|---|---|---|
| Applies to | All mutual fund schemes | Debt schemes |
| What it shows | Current overall risk on a six-level scale | Maximum interest rate and credit risk the scheme can take in a nine-cell grid |
| Based on | The scheme’s actual portfolio reviewed monthly | The scheme’s stated limits on duration and credit quality |
| Question it answers | How risky is the scheme now? | How risky can the scheme become? |
Common mistakes when reading the riskometer:
- Treating Low as no risk: Low means risk, not zero. Even liquid funds have had losses during rare credit events.
- Treating High as poor quality: It reflects volatility. Many strong equity funds are at High or Very High because equities move a lot.
- Using it to predict returns: A higher level means swings, not better returns.
- Ignoring changes: A monthly rating change means the portfolio shifted. It’s worth checking why.
- Skipping the investment horizon: A High scheme can be right for long-term goals but wrong for short-term needs.
What investors should take from this:
The riskometer gives an idea of how much a scheme’s value can move. The right level depends on your goal. How long you can invest. Reading it alongside the benchmark’s dial the date of the reading and the factsheet gives a picture than any one part alone.
Kuvera offers mutual funds. Every scheme listed on Kuvera includes the SEBI riskometer in its documents.
Frequently Asked Questions
1. What is the riskometer in funds?
It is a SEBI-mandated dial that shows a scheme’s risk level on a scale from Low to High based on its current portfolio.
2. How is the riskometer updated?
It is updated every month based on the scheme’s holdings. The new rating is published on the fund house’s website.
3. What are the six risk levels?
Low, Low to Moderate, Moderate, Moderately High, High and Very High.
4. Does a High riskometer mean a bad fund?
No. It means the fund’s value can swing widely. Most equity funds are at this level. Whether it fits you depends on your goal and time horizon.
5. What is the difference between the riskometer and the PRC matrix?
The riskometer shows the risk of any scheme on one dial. The PRC matrix shows the maximum interest rate and credit risk a debt scheme can take, using a nine-cell grid.
Mutual fund investments are subject, to market risks. Read all scheme-related documents carefully.
