What is Riskometer? How is it Useful for the Investors?
If you are a regular investor in mutual funds or have an interest in buying a mutual fund plan, then you must have gone through the term ‘Riskometer’ showing the risk appetite of different funds. Do you understand what it actually represents? Do you know what advantage it has for your investment decision?
If not, then you must gain the exact knowledge about it, because it is one of the most important parameters which must be considered by the investors while choosing funds.
Understanding Risk Appetites in Mutual Funds
In a mutual fund plan, the risk basically refers to the probability of earning fewer returns than those expected. In other words, the risk is nothing but the volatility of returns on the investment. Risk and returns are correlated to each other and are directly proportionate. Higher the risk, higher the returns and vice versa. Accordingly, the risk is not always evil. If you take high risk in mutual fund and manage your investment in a prompt manner, you will definitely be compensated with greater profits.
The risk appetite is classified into three broad categories in mutual funds which include high-risk, medium-risk and low-risk profile. As per the financial status of the investors, they can choose any one of them to make the best choice of suitable funds for their portfolio.
Before buying the fund for your portfolio, you always want to select the scheme that matches your risk appetite, right? But how do you come to know about it? With the help of Riskometer of course! In 2013, the market regulator, SEBI (Securities and Exchange Board of India) asked all the mutual fund houses to mention the product labels of their schemes in order to specify the risk factors. It specified different colors to showcase the level of risk involved in that particular fund. They were as under:
- Blue: for funds having Low Risk
- Yellow: for funds having Medium Risk
- Brown: for funds having High Risk
All the products of the fund houses were required to display the label of the specific color to define the scheme’s risk appetite. The idea behind such labels was to let the investors know which fund is best suited to their requirements.
Later, it happened that many investors could not exactly understand their risk and could not choose from the three categories. Thus, there were two additions in the risk category which was ‘Moderately High’ and ‘Moderately Low’. Furthermore, in 2015, SEBI introduced the new way of describing scheme’s risk with the help of Riskometer. It looks just like the car’s speedometer and helps in determining the exact risk involved in any scheme. Then onwards, as per SEBI specifications, every fund house started showcasing the riskometer in the offer document of the schemes to display their risk profile.
Who Decides the Risk Level of Scheme?
The Association of Mutual Funds in India (AMFI) has formed a committee which is responsible for presenting the guidelines and basic standards of using the riskometer so as to ensure standardisation. Accordingly, the risk level shown in the riskometer is determined by the fund houses after following the guidelines specified in this respect.
How Beneficial is Riskometer for the Investors?
While selecting the mutual fund plan for your investment portfolio, you must want to opt for the one that suits your requirements. If you have a low-risk profile and don’t want to take exposure to the market volatility, then you can check the risk level of the scheme from riskometer and select the fund accordingly. Hence, it is very useful for the investors while buying the best-suited fund for their portfolio.
At MySIPonline, all the categories are being showcased with the riskometer which will help you in making the right choice for your portfolio. If you need any financial advice for your requirements, then you must get associated with us and remain in touch with our operations’ team through the Support Desk. We are always there to cater to your investing needs.
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