Securities Exchange Board of India (SEBI) defines and implements the safety standard for investors in Indian stock markets. One such step to protect the investors in mutual funds industry is Riskometer.
Often motivated by greed and pressure from financial advisors, amateur retail investors invest in mutual schemes that have high degree of risk.
In 2015, SEBI mandated all fund houses to display a riskometer containing 5 different colour codes associated with 5 different levels of risk.
Riskometer is a pictorial representation of the underlying risk to the principle invested. For easier understanding, it also has a colour coded scheme. The five levels of risk displayed on the riskometer are low, moderately low, moderate, moderately high, and high.
Through riskometer investors get a clear picture where they are investing their money and how volatile it can be.
It's for investors who want to take the least possible risk with their investments. Funds that fall in low risk bracket majorly invest in fixed income securities such as treasury bonds, certificates of deposits and corporate bonds. It's best suited for investors who want a stable source of income. Here, the investor's top priority is safety of capital. Investor is willing to accept lesser returns against a negligible risk of principal investment.
This category majorly invests in short and medium term bonds, along with minimum exposure to equity. It is suitable for investors who do not want to take substantial risk. Here, the investor is willing to take small risk in exchange for some potential returns over medium to long-term.
Arbitrage funds, monthly income plans (MIP) and hybrid debt oriented funds come under the moderate risk category. Here the investor is willing to take some risk, while looking at medium to long-term investment horizon. Investors are willing to take moderate level of risk in exchange for relatively higher potential returns over long-term investment horizon.
The principle invested here is under moderately high risk implying a higher risk return trade-off for investors. The funds that fall under this category invest in balanced equity funds, index funds, Gold ETF and diversified equity funds. Investors undertake a relatively higher risk to maximize potential returns over the medium to long-term investment tenure.
Sectoral funds, thematic funds and small and micro-cap funds fall under high risk bracket. Investors that have a big risk appetite and are looking to create wealth over a long period of time generally invest in high risk funds. High risk investor knowingly accepts a significant risk to maximize returns over the long term and is fully aware that a significant part of the capital might convert to loss.
Investors should invest in accordance with their risk profile. Riskometer is only one such tool to construct a balanced investment portfolio. Investors should look at all the factors such as credit ratings, fund manager's past performance, economic outlook among other factors.