Riskometer

What is Riskometer?

A riskometer is a pictorial depiction of the risk profile of a mutual fund scheme. It shows the level of risk associated with the principal amount invested in a mutual fund. The riskometer consists of 5 levels: low, moderately low, moderate, moderately high, and high.

In 2015, the Securities and Exchange Board of India (SEBI) made it mandatory for all mutual fund houses to display a riskometer for all of their mutual fund schemes to enable investors assess the amount of risk associated with mutual fund investments.

The below table gives a snapshot of risk profiles of some mutual fund categories:

Low Risk	Moderately Low Risk	Moderate Risk	Moderately High Risk	High Risk
Liquid Funds	Short-duration Funds, Ultra Short-duration Funds	Fixed Maturity Plans (FMPs)	Large Cap Funds, Mid and Small Cap Funds, Balanced Funds	Sectoral Funds

So, which risk profile is suitable for you?

You can understand which risk profile is suitable for you with the help of the below table:

Risk Profile	Type of Investor
Low Risk	Investors willing to accept low returns for high safety of principal amount.
Moderately Low Risk	Investors willing to take a small amount of risk for potential returns.
Moderate Risk	Investors willing to accept a moderate level of risk for moderate returns.
Moderately High Risk	Investors willing to take relatively high risk for high returns.
High Risk	Investors willing to lose capital for significantly high returns.

What Type of Risk Does the Riskometer Measure?

Debt Funds

• Credit Risk: Risk that there will be defaults on the bonds/securities held by the fund.

• Interest Rate Risk: Risk of change in the value of the fund’s bonds/securities due to a change in the interest rates.
• Liquidity Risk: Risk of the fund manager being unable to honour redemptions due to illiquidity in the debt securities held by the fund.

Also Read : Best Debt Mutual Fund to Invest in 2019

Equity Funds

• Market Risk: Risk of decline in the value of the fund in the event of downward trend in the stock market.
• Fund Manager Risk: Risk that the fund manager underperforms the stock market. For instance, the fund generates a 5% return while the stock market registers a gain of 10%.

Also Read : Top 8 Equity Mutual Funds to Invest in 2020

What to do when you are at risk?

• Change asset class of fund: Move from equity funds to debt or balanced funds.

• Move to low-risk fund schemes within the same category: If you have invested in sectoral or thematic funds, move to large cap or multicap funds.

Diversification: Diversify your fund portfolio by adding funds which were not previously present. For instance, if you do not hold in any gold in the portfolio, you can allocate 5%-10% of the portfolio to gold.