The risk-o-meter for mutual funds is finally out and for some while it has been a cheerful announcement with their funds seeing risk level going down, for others it has resulted in a case to worry as the risk level has gone higher. And now here we tell you what all is there for you in this risk-o-meter aspect to pay heed to, if you are into mutual fund investing.
Risk-o-meter as it was previously
Previously the fund was categorized into 5 risk categories namely
2. Low to Moderate
4. Moderately High
But instead of being risk-rating measure for the fund, it was largely for the fund category. Initially, the SEBI categorized mutual funds were put in a particular risk measure and then automatically the fund falling in it was given the same rating.
So, now as it was a broad classification, and the fund can have little or no link with the broader fund category, this risk-o-meter categorization was primarily faulty and didn't served the real purpose of investor knowledge. And risk can be posed from all of the factors such as the lack of liquidity as in the recent debt fund fiascos. Also, there was no variation in the risk-o-meter with time.
Current and New Risk-o-meter in mutual funds: How it can serve investors?
And as a modification, the latest Risk-o-meter classification is based on the portfolio holding of each of the fund. So, it comes as a help to investors in 2 ways:
1. First it enables decision making by investors' as to whether they should invest or not in a particular mutual fund.
2. And second, with market dynamics, there will be a change again made to the risk assessment of the fund and this will help investors understand as to whether or not they should redeem their investment in the fund at a particular stage. But this from investors' end need careful watch and proactive approach.
So, investors' will need to play their part and keep track of the changes in risk assessment for the various mutual funds.
What is Risk perceived to be as for Equity and Debt funds?
In debt funds, there should be no compromise on liquidity or credit and they should show movement in a range. And in the case of equity funds, volatility is taken as a measure to determine the risk level and in case a particular fund has more of small and mid cap stocks, the risk level goes higher.