Securities Exchange Board of India (SEBI) has asked the mutual fund houses to mention the risk-o-meter of the scheme and the benchmark of the scheme in all its promotional communications. The regulator further asked all mutual funds to provide a link to each investor which will help them view or download risk-o-meter of the benchmark and the scheme in which they are invested into. Earlier some fund houses would send a link that would have the risk-o-meter information of all schemes of the fund houses.
It has been made mandatory for all ‘go-green’ initiatives and communications to carry the information pertaining to risk-o-meter of the scheme and the benchmark. Mutual funds have been asked to source the risk-o-meter of the benchmark from the index service providers by fifth day subsequent to the end of the month. The mutual fund houses are asked to abide by the new rules by October 1, 2021. Though, the fund houses can at their discretion choose to follow the new rules before the stipulated date.
“As the investors get the link to see the risk-o-meter of the scheme they are invested into, they see only relevant information. Avoiding information overload helps investors in decision making,” says G Pradeepkumar, CEO, Union Mutual Fund.
Risk-o-meter mechanism was revamped by SEBI in October 2020 and it was made effective from January 1, 2021. The new risk-o-meter is based on the portfolio of the scheme and have six levels of risks. Unlike the old system wherein the risk-o-meter was decided at the time of launch of the scheme, the new system revisits risk-o-meter every month. Regulator then called for communication of changes in risk-o-meter in all the statutory documents including application forms.
Risk-o-meter along with risk class matrix mechanism issued by the SEBI in June 2021 can help gauge the risk involved in a mutual fund scheme. While the risk class matrix defines the maximum risk the scheme can take, the risk-o-meter helps the investors with the extent of risk taken at a given moment of time. Risk-o-meter can change each month. But a change in risk class matrix of the scheme is a change of fundamental attribute of the scheme.
As SEBI further issues guidelines about the communications of the risk indicators, the investors are better placed to take an informed decision. At a time when the interest rates are low and the equity markets are making new tops, the understanding of risk is a must for most investors.