Mutual funds: How riskometer helps investors manage risks effectively to meet their financial goals

livemint.com:

mutual funds is quite similar; it's crucial to understand the risks involved and the mitigation processes to be able to navigate through it. The Riskometer can serve as one of the important tools for investors in this journey, enabling them to make smarter and well-informed decisions. Whenever you open a scheme-related document, one of the first things you will see is a semicircle with an arrow pointing towards the ‘Risk’ levels associated with that fund.

In 2015, SEBI introduced the ‘Riskometer’ as a benchmark of risk in the given scheme. Prior to that, fund houses would colour code risk in blue, yellow, and brown codes to indicate low, medium, and high risk, respectively. The riskometer introduced back then, however, did not capture the granular risks associated with mutual fund schemes.

Thus, SEBI further refined it to identify and classify risk under low, low to moderate, moderate, moderately high, high, and very high risk based on their individual categories. The master circular determined risk based on the actual underlying holdings of a fund, recognising market capitalisation, volatility, and liquidity in the riskometer. Over the years, it has worked well on the equity as well as debt side, promoting transparency amongst investors.

The riskometer is a standardised tool used by mutual fund houses to communicate the risk levels of individual funds. It offers a visual representation of a fund's risk profile that uses a needle (like that of a compass) to represent different risk levels: Low Risk: Investors investing in funds categorised as ‘Low Risk’ can expect their principal to be subjected to Low Risk. Investments in this category are suitable for investors willing to take minimal investment risks.