SEBI requires every mutual fund scheme to display a risk-o-meter on its documents, fact sheets and advertisements. It shows the level of risk in the scheme's portfolio on a scale of six levels.
The six levels
- Low
- Low to Moderate
- Moderate
- Moderately High
- High
- Very High
How it is decided
The level is calculated from the scheme's actual portfolio, using factors such as market capitalisation, volatility and liquidity for equity, and interest rate risk and credit risk for debt. Because portfolios change, AMCs review the risk-o-meter every month and disclose changes to investors.
What it does not tell you
The risk-o-meter shows the risk level of the scheme, not the returns it will generate. Two schemes at the same level can perform very differently. It also does not tell you whether a scheme suits you; that depends on your holding period, need for liquidity and ability to bear losses.
A good habit
Look at the risk-o-meter and the benchmark risk-o-meter together whenever you read a scheme document, and check again if the AMC informs you of a change in the risk level.