To explain what a riskometer in mutual funds is, let us first take a person as an example, Mahesh. A few years ago, Mahesh, an IT professional working for a Fortune 500 company, decided that he needed to create more money. Without properly researching, he invested aggressively in an equity fund. When the market went down, it mercilessly wiped out a significant portion of his investment. He was understandably distressed.
If only he had consulted a mutual fund advisor who explained the riskometer in mutual funds to him. It is a very important and necessary tool for investors like Mahesh, as it helps them understand how risky a mutual fund is before investing their money, earned through blood, sweat, and tears.
Function of a riskometer work?
The riskometer is an efficient tool, and its effective application involves measuring risk. It was introduced by the Securities and Exchange Board of India. It helps investors assess the level of risk involved in different mutual fund schemes. It works with all mutual funds because they are legally required to display a riskometer in mutual funds in their documentation to ensure transparency and clarity. It classifies investments into six risk categories using a gauge that ranges from low to very high. This helps ensure that investors align their capital investments with their risk tolerance.
Riskometer’s Color Code Classification
In order to visually represent the risk associated with each and every fund, colour coded classification exists. It is standardised system that makes sure that the investors from beginners to veterans can simply interpret the level of risk before making a decision. Here are the six levels
- Low risk (Dark Green): It is best for conservative investors who want steady returns with very little risk.
- Low to moderate risk (Light Green): Suitable for investors who want slightly better returns while still keeping risk low.
- Moderate risk (Yellow): Ideal for those who are comfortable with some ups and downs in the market.
- Moderately high risk (Coffee Brown): For investors who can handle higher market swings in exchange for better return potential.
- High risk (Orange): Meant for aggressive investors who mainly invest in equities.
- Very high risk (Red): For investors aiming for the highest returns and who are ready to face significant risk.
Different Risk Levels in Mutual Funds
The risk levels below help investors pick which funds align with the risk they are willing to take.
Low risk:
Funds that are considered low risk invest in government bonds, treasury bills, and fixed deposits. They do not expose your money to unnecessary risk and instead focus on providing steady returns. These funds have little to no equity exposure, which keeps price fluctuations relatively low. They are especially suitable for retirees or investors who prefer safety over high returns.
Low to moderate risk:
Typically liquid funds and ultra short debt funds, corporate bond funds possess low to moderate risk. They are better than low risk funds when it comes to offering slightly better returns while still remaining stable. If you are aiming for short to medium goals with small amount of risk it is good for you.
Moderate risk:
Funds that invest in both equity and debt to achieve a balanced level of risk and return fall under this category. This includes hybrid funds, dynamic bond funds, and balanced advantage funds. Investors considering this risk level should be aware that these funds have their own ups and downs, and disciplined investing is essential to stay the course.
Moderately high risk:
It has higher market movement because a large portion of investments go into equities. Hybrid and equity-oriented balanced funds fall into this category. They can give higher returns, but losses can also happen in the short term. These funds are best for long-term investors who can emotionally and financially handle market volatility.
High risk:
High-risk funds invest mostly in equities such as large-cap, mid-cap, and small-cap stocks. Prices can rise and fall sharply, but returns can also be high over the long term. These funds are suitable for aggressive investors who has a high risk appetite.
Very high risk:
These funds focus on specific sectors or themes like technology, healthcare, or foreign markets. Because they depend on limited areas, their prices can change rapidly. While returns can be extremely high, losses can also be significant. These funds are suitable for experienced investors who understand market risks well.
Why Is the Riskometer Important?
It is perhaps the most important measurement tool for investors. Like the meter in a vehicle, it helps you maintain the right pace based on how much risk you can take. We’ve listed a few key benefits — take a look at them.
- You can make informed decisions without suffering situations you cannot handle. You won’t make impulsive choices.
- Because of SEBi mandates all mutual funds display riskometer in mutual funds colors in documents. It ensures that investors know what they are getting into.
- Investors can put their funds strategically by avoiding risks they are not willing to take. It also makes diversification easier.
- It makes it easy for investors to understand what is risky investment and what isn’t. The high and low risk assessments help them avoid volatility.
- The risk-level visuals can help investors better calculate their SIP plans according to appropriate risk levels, improving overall financial planning.
Conclusion:
As mutual fund advisors, we understand how risks can affect investors. That’s why we highly recommend understanding the concept of the riskometer in mutual funds. It provides much-needed clarity and helps investors make informed decisions. If you have any doubts or would like someone to manage your investments, contact ProfitsZone MFD.