Mutual Fund Investment: Riskometer to Replace Colour Code..!

From July, 2015 mutual fund schemes will no longer use the three colour-coded risk indicators to tell investors how risky the scheme is.

Instead, capital market regulator Securities and Exchange Board of India (SEBI) wants fund management companies to switch to a 5 level speedometer-like indicator to depict risk.

SEBI announced this in a circular on recently.

The new “riskometer” has the following levels:

1. Low - principal at low risk;

2. Moderately low — principal at moderately low risk;

3. Moderate — principal at moderate risk;

4. Moderately high — principal at moderately high risk;  and

5. High — principal at high risk.

Currently, there are only 3 risk grades:

1. Blue — principal at low risk;

2. Yellow — at medium risk;

3. Brown — principal at high risk.

Usually, fixed maturity plans (FMPs), gilt & income funds fall in the blue category while balanced funds & unit-linked insurance plans (ULIPs) are graded yellow.

Pure equity  mutual funds carry the brown colour code.

In its circular, SEBI also noted that mutual funds may choose to label their products based on best practices by industry body Association of Mutual Funds of India (AMFI).

The new risk grading comes into effect from July 1, 2015 to all existing and new schemes. However, individual fund houses can choose to adopt it sooner.

SEBI introduced product labelling in 2013 in order to address miss-selling and “to protect the interests of investors in securities and to promote the development of and to regulate the securities market.”

The risk label needs to be disclosed on the front page of the scheme information documents, the common application form and advertisements for the scheme.

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