The product labelling of mutual funds is based on the concept of 'Riskometer' and this meter depicts the level of risk in any specific mutual fund scheme.
As a mutual fund investor, one should invest across different schemes based on their own risk profile.
Market regulator Securities and Exchange Board of India (SEBI) has a system of product labelling in place that ensures the investor makes investments in mutual fund schemes that correspond to the investor’s risk profile. The product labelling of mutual funds is based on the concept of ‘Riskometer’ and this meter depicts the level of risk in any specific mutual fund scheme.
Till now, the Riskometer depicted five risk areas – Low, Moderately Low, Moderate, Moderately High and High Risk. Going forward, there will be a new risk area for the MF schemes. SEBI, based on the recommendation of Mutual Fund Advisory Committee (MFAC), has reviewed the guidelines for product labeling in mutual funds and has decided to introduce, ‘Very High Risk’ as the sixth risk profile for the MF schemes.
The 6 kinds of risk that an MF may carry will now be as follows:
i. Low Risk ii. Low to Moderate Risk iii. Moderate Risk iv. Moderately High Risk v. High Risk and vi. Very High Risk
Also, till now the risk was being denoted category-wise. However, going forward, the level of risk will have to be denoted scheme-wise. The calculation of the risk value of the scheme portfolio will be based on the methodology specified by the regulator.
Based on the scheme characteristics, Mutual Funds shall assign a risk level for schemes at the time of launch of scheme /New Fund Offer. Any change will have to properly communicated to the investors by way of Notice cum Addendum and by way of an e- mail or SMS to unitholders of that particular scheme.
How to find scheme risk level
The product label shall be disclosed on:
a. Front page of initial offering application form, Scheme Information Documents (SID) and Key Information Memorandum (KIM).
b. Common application form – along with the information about the scheme.
c. The product label shall be placed in proximity to the caption of the scheme and shall be prominently visible.
d. Scheme advertisements
SEBI has informed that this new mutual fund rule shall be in force with effect from January 1, 2021, to all the existing schemes and all schemes to be launched on or thereafter. However, mutual funds may choose to adopt the provisions before the effective date.
How it helps
As a mutual fund investor, one should invest across different schemes based on their own risk profile. To help in taking such a decision, the product labelling of MF schemes helps. While risk and return are inversely correlated, one needs to be aware of the kind of risk that a specific MF schemes carry. The new move of SEBI will help investors make a more informed investment decision.