Riskometer in mutual funds: what the 6 levels mean

The six levels

1. Low
2. Low to Moderate
3. Moderate
4. Moderately High
5. High
6. Very High

SEBI introduced this six-level scale in October 2020 and requires fund houses to evaluate each scheme's risk level every month, based on what the scheme actually holds, and to disclose the level and any change.

What it measures

The level is assigned using the scheme's portfolio: for equity, factors such as market-cap mix, volatility and liquidity of the holdings; for debt, credit risk, interest-rate risk and liquidity. A small-cap fund will generally show Very High; a liquid fund, Low to Moderate. The riskometer sits on the scheme's factsheet, advertisements and application form.

Debt funds also carry a risk matrix

For debt funds SEBI adds a Potential Risk Class (PRC) matrix: a grid of interest-rate risk and credit risk, each rated low, medium or high, that tells you at a glance where a debt fund can fall. A scheme positioned in the "low credit, low interest-rate risk" cell is designed to be steadier than one in the "high credit, high interest-rate risk" cell. See debt funds.

What the riskometer does not tell you

• It is the fund's risk, not your risk. Whether that risk suits you depends on your risk profile: your capacity, willingness and goal horizon.
• It is a snapshot. The level can change month to month as the portfolio changes.
• It does not predict returns or losses. A "Very High" scheme can fall 30%, but the riskometer does not say when or how much.
• It compares funds only roughly. Two schemes with the same level may still behave differently.

How to use it

1. Check the riskometer of every fund before you buy.
2. Confirm it fits the time you have: do not put a goal that is 2 years away into a fund labelled High.
3. Check it again once or twice a year; if the level has risen since you bought, ask why.