What is Riskometer?

RIskometer

Table of Contents

Every individual actively involved in investment business knows this that with any type of investment; risk comes along as complimentary side dish. Therefore, before getting involved in any investment, an investor needs to be aware of the risk that will automatically follow.  

For instance, in mutual funds, there was a color coding that showed the risks applicable on each of the mutual fund schemes available. However, with most of the schemes falling under the same category, the investors were bound to get confused with regards to choosing the mutual fund that they would wish to invest in. 

To make it easier for the investor to understand the risks associated with the various investment options available, SEBI, from 2015 has mandated it for all mutual fund houses to have a riskometer attached to all the schemes sold by them. 

what exactly is a riskometer?

By the name itself, it’s clear that it’s a scale to measure risk factor. A riskometer refers to depiction of risks associated with a scheme in a picture form so that an investor of every age group, novice or experienced, can understand the risks associated clearly and make a wise decision.  

The risks are depicted under 5 levels namely low, moderately low, moderate, moderately high and high, with low being the lowest risk factor and high, of course, being the highest risk factors involved in that particular scheme.  

The risk profiles can be understood in brief by its explanations given below: 

Low risk:

The safety factor involved is high in this one, so the returns are generally low. 

Moderately low risk:

Risk is involved but only a bit, which gives a bit higher returns than the above. 

Moderate risk:

Risk factor is moderate in nature and so is the return that one gets. 

Moderately high risk:

Risk factor is moderately high along with the returns that an investor gets in it. 

High Risk:

The risk factor is highest but also offers the best possible returns among all schemes falling under the above categories. 

Now, when it comes to computing the above level of risks, it’s obvious that only one factor can’t be taken into account as there are several factors involved with it. Following are the points that are taken into account before computing the riskometer level: 

For measuring risks of debt funds:

  1. Credit Risk: The possibility of happening of default on securities involved in the fund. 
  1. Interest rate risk: Interest rate can change due to various factors, which might lead to change in the value of the securities or bonds involved in the fund. 
  1. Liquidity risk: In case, the fund manager isn’t able to redeem the investors debt funds due to lack of liquidity, this risk is involved there. 

For measuring risk of equity funds:

  1. Market risk: Equity funds involve a risk of going down in their value in case the bearish market trend makes an appearance. 
  1. Fund manager risk: There is a possibility of the fund manager not making the fullest utilization of the market situations and thereby, bringing you lesser gains than expected. 

In case the fund that you’ve selected has moderate or above risk factor involved, here’s something that you can do if you prefer lower risk or volatility: 

  • Change your funds from equity to debt funds or keep a balance of both the funds. 
  • Diversify your portfolio and invest in both high risk as well as low risk funds to harbor best returns. 

While introduction of riskometer has relaxed the investors to some extent, it cannot be considered as the sole indicator of risks involved. One must also look at how the fund in doing in the market at present as well as its previous performances and make use of his own common sense to select the fund.