Mutual Fund Riskometer: How to gauge your risk tolerance

DSIJ Intelligence/ 31 Jan 2019 /Categories: Mutual Fund

Mutual Fund Riskometer: How to gauge your risk tolerance

Risk is as important as the return of an investor. Therefore, before investing in a fund you should understand the risk involved while investing in the fund.

✨ Key Takeaways

Risk is an important part of your investment decision. For many investors, risk comes first and returns later on. In fact, the risk appetite of the investor determines his investment choice. For example, if you are an aggressive investor and willing to take higher risk, you can invest in equities and that too in small-cap funds. Nonetheless, if you are a risk aversive investor, you prefer investing in fixed income securities or debt funds.

To help investors be aware of the risks associated with mutual fund investments, SEBI has made it mandatory for all fund houses to display a riskometer depicting the five levels of risk. Riskometer is a visual representation of risk grading of a mutual fund scheme to enable investors to intuitively gauge relative risk associated with a mutual fund scheme. It helps them understand the risk representation easily and take an informed decision while investing.

Prior to the mandatory use of riskometer by mutual fund schemes, funds were required to ‘label’ the mutual fund schemes using colour coded boxes to indicate the level of risk of a scheme. This provided an investor with an easy understanding and suitability of schemes. After this SEBI stipulated that the depiction of risk using colour codes will be replaced by a pictorial meter named Riskometer.

The below table shows riskometer different labels and its suitability to different investors

Riskometer label	Suitable Investor Type	Investor Persona
Low	Conservative	Investor’s top priority is the safety of capital. She/he is willing to accept relatively low returns against a low risk of principal.
Moderately Low	Moderately Conservative	The investor is willing to accept a small level of risk in exchange for some potential returns over a medium to long-term.
Moderate	Moderate	The investor can tolerate a moderate level of risk in exchange for relatively higher potential returns over a medium to long-term.
Moderately High	Moderately Aggressive	The investor is keen to accept a relatively higher risk to maximize potential returns over the medium to long-term.
High	Aggressive	The investor is willing to accept a significant risk to maximize potential returns over the long-term and is aware that she/he may lose a significant part of the capital.