Investor education
The mutual fund riskometer, explained
Every mutual fund scheme carries a riskometer: a six-level dial from Low to Very High, set by SEBI's rules and recalculated every month from what the scheme actually holds. Tap a level to see what it means.
How SEBI works out the level
Since 1 January 2021, under SEBI's circular of 5 October 2020, each security in a scheme gets risk scores, and the scheme's level comes from the average of its holdings, weighted by how much of the money sits in each.
- Equity is scored on three things, then averaged: market capitalisation (large cap 5, mid cap 7, small cap 9), volatility over the past two years (5 if daily volatility is 1% or less, otherwise 6) and impact cost, a measure of how easily the share trades (5, 7 or 9).
- Debt is scored on credit risk (1 for government securities and AAA, rising to 12 below investment grade), interest rate risk by Macaulay duration (1 for up to six months, rising to 6 for more than four years) and liquidity risk (1 to 14). The three are averaged, but if liquidity risk is higher than the average, it counts instead.
- Other holdings have fixed values: gold 4, REITs and InvITs 7, foreign securities 7, cash 1. Units of other schemes count at their own riskometer level. Derivatives used purely to hedge are left out.
- For a scheme with several asset classes, each part is scored and the parts are added up by weight.
| Risk value | Riskometer level |
|---|---|
| Up to 1 | Low |
| More than 1, up to 2 | Low to Moderate |
| More than 2, up to 3 | Moderate |
| More than 3, up to 4 | Moderately High |
| More than 4, up to 5 | High |
| More than 5 | Very High |
Try it: build a scheme and see its level
A simplified illustration of SEBI's method, using typical scores for each kind of holding. Real schemes are scored security by security.
Updated every month
- Fund houses evaluate each scheme's riskometer every month, using the holdings on the last day of the month, and publish it with the portfolio on their own website and AMFI's within 10 days.
- When the level changes, the fund house issues a notice and tells unitholders by email or SMS. A change in level is not a change in the scheme's fundamental attributes, so it does not come with a free exit window.
- Every year fund houses disclose each scheme's level as on 31 March and how many times it changed during the year.
- The riskometer appears on application forms, scheme documents and advertisements.
For debt funds: the Potential Risk Class
Since 1 December 2021, every debt scheme also shows a Potential Risk Class (PRC): a cell in a 3 × 3 grid that marks the most interest rate risk and credit risk the scheme may take. Unlike the riskometer, it does not move with the month's portfolio. Moving a scheme to a higher-risk cell is a change in its fundamental attributes, which needs advance notice and a window to exit without an exit load.
Interest rate risk is set by Macaulay duration: class I up to 1 year, class II up to 3 years, class III any duration. Credit risk is set by the portfolio's average credit risk value (government securities 13, AAA 12, AA+ 11, AA 10 and lower for weaker ratings): class A 12 or more, class B 10 or more, class C below 10.
How to use the riskometer
- Match it with your own risk profile. Take our five-question risk quiz and compare your profile with the schemes you hold.
- Very High is normal for equity. Almost every equity fund sits there; what matters is whether your goal is far enough away to ride out the falls. See how often the Nifty lost money over different holding periods.
- Check it from time to time. A scheme's level can change as its portfolio changes; the monthly factsheet shows the current one.
- It is not a measure of returns. A Low-risk fund can still lose money in rare events, and a Very High one can do well over long periods.
Questions people ask
What are the six levels of the riskometer?
Low, Low to Moderate, Moderate, Moderately High, High and Very High. SEBI introduced the sixth level, Very High, from 1 January 2021.
How is a scheme's riskometer level worked out?
From its actual holdings every month. Equity is scored on market capitalisation, volatility and impact cost; debt on credit risk, interest rate risk and liquidity risk; gold, REITs, foreign securities and cash have fixed values. The weighted score falls in one of six bands: up to 1 is Low and more than 5 is Very High.
How often does the riskometer change?
It is evaluated every month and published with the portfolio within 10 days of the month-end. When it changes, the fund house issues a notice and informs unitholders by email or SMS. A change in level is not a change in the scheme's fundamental attributes.
What is the difference between the riskometer and the Potential Risk Class?
The riskometer shows a scheme's current risk from its holdings and can change monthly. The Potential Risk Class, for debt schemes only, shows the most interest rate risk and credit risk the scheme is allowed to take; moving it to a higher-risk cell needs advance notice and a free exit window.
Sources: SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/197 of 5 October 2020 (product labelling and the riskometer) and SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/573 of 7 June 2021 (Potential Risk Class), now part of SEBI's Master Circular for Mutual Funds. Illustrative levels are typical, not fixed: always check a scheme's current riskometer. General information for education, not investment advice. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.