There will be six risk levels – Low Risk, Low to Moderate Risk, Moderate Risk, Moderately High Risk, High Risk and Very High Risk
It was about five years ago when all MF schemes were required to display an image of a risk-o-meter which indicates the scheme’s risk level. However, this risk metric, which virtually looks like a car’s speedometer, did not help investors much, as we have seen over the years partly also due to the weak understanding of risk by investors themselves. So, on October 5, regulator SEBI announced some changes in the product labelling in MFs through the risk-o-meter approach. The new moves by SEBI will help investors make a more informed investment decision, thanks to the fresh approach taken for the risk-o-meter. In this article, we will take a look at these changes that have to be implemented from the 2021 calendar year. Read on.
Earlier, the risk-o-meter displayed five risk levels – Low, Moderately Low, Moderate, Moderately High and High. In the new scheme of things, there will be six risk levels – Low Risk, Low to Moderate Risk, Moderate Risk, Moderately High Risk, High Risk and Very High Risk.
Do note that the new risk-o-meter has the ‘Very High Risk’ level. Also, the risk levels in the new format have the word ‘risk’ in each of them.
The risk level of a scheme will be evaluated using a methodology. This will be done by first, the underlying securities of a scheme will be assigned a value for each of the parameters based on which the risk-o-meter value will be calculated. Next, for the purpose of evaluation of risk level, AUM of the security forming part of the scheme portfolio will be as on last day of the given month. Third, there will be parameters for scheme constituents like Debt securities, Equity, Equity Derivatives, Index Futures & Stock Futures, Index Options & Stock Options, REITs & InvITS, Gold and related, Foreign Securitues, other MF schemes etc.
Based on the calculations, the risk value arrived upon will be mapped to the risk level (≤ 1 = Low, >1 to ≤ 2 = Low to Moderate, >2 to ≤ 3 = Moderate, >3 to ≤ 4 = Moderately High, >4 to ≤ 5 = High, >5 = Very High).
Do note SEBI has introduced a liquidity parameter for both equity and debt schemes and assigning higher weights to schemes investing in relatively illiquid securities.
Takeaway – From 2021, investors by looking into the risk-o-meter will be able to distinguish between the risk of funds within a category. This is on account of the quantitative methods that SEBI has directed fund-houses to employ to do a good job of risk labelling on the product side.
Those debt funds that have lower-rated credit or higher maturity papers are to be determined as riskier compared to peers. For equity funds too, higher risk weights are likely to be given to small and midcap stocks, making them riskier on the risk-o-meter compared to peers.
From now on, any change in risk-o-meter will have to be communicated by way of Notice cum Addendum and by way of an e-mail or SMS to unitholders of that particular scheme.
Risk-o-meter will be evaluated on a monthly basis. Mutual Funds/AMCs will have to disclose the risk-o-meter along with portfolio disclosure for all their schemes on their respective website and on AMFI website within 10 days from the close of each month.
Mutual Funds have also been directed to disclose the risk level of schemes as on March 31 of every year, along with the number of times the risk level has changed over the year, on their website and AMFI website.
Also, mutual funds will have to publish a table of scheme wise changes in risk-o-meter in scheme wise annual reports and abridged summary. This will mention the specific scheme name, risk-o-meter level at start of the financial year, risk-o-meter level at end of the financial year, and mention the number of changes in risk-o-meter during the financial year.
The regulator has also directed that the product label has to be disclosed on front page of initial offering application form, scheme information documents (SID) and key information memorandum (KIM), common application form, scheme ads etc. The product label has to be placed in proximity to the caption of the scheme and has to be made prominently visible.
Takeaway – The monthly publishing of risk-o-meter makes it a dynamic tool, thus giving investors an updated view each month (if there is any change).
By putting the product label on the front page, risk-o-meter will get prominence. This will help investors understand the risk level of the specific scheme. Earlier, product label used to be buried near the end of many product communication, reducing its reach and purpose.
Subscribe & keep learning!