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<ul><li>The <keyword id="2831405" type="General" weightage="20" keywordseo="riskometer" source="Orion">riskometer</keyword> is calculated based on a number of factors, including the type of assets of the <keyword id="6354820" type="General" weightage="20" keywordseo="mutual-fund" source="Orion">mutual fund</keyword>, the fund's volatility, and the credit quality. </li><li>Equity funds, which invest in stocks, are generally considered to be more risky than debt funds, which invest in fixed income instruments. </li><li>When choosing a mutual fund, it is important to consider your own <keyword id="2067937" type="General" weightage="20" keywordseo="risk-tolerance" source="Orion">risk tolerance</keyword> and investment goals. </li></ul>Mutual funds carry varying levels of risk. These risks can be influenced by factors such as the types of investments held within the fund, prevailing market conditions, and the chosen strategy of the fund manager. It is crucial for investors to evaluate their risk tolerance and align it with the fund's risk level before investing. This helps ensure that the chosen mutual fund aligns with their financial goals and comfort level with potential fluctuations in returns. <cmsannotation type="cmsannotation" annotationid="Market regulator’s initiative" comment="Subhead" text="Market regulator’s initiative">Market regulator’s initiative</cmsannotation> The mutual fund riskometer is a representation of the risk associated with a mutual fund scheme. It was introduced by the Securities and Exchange Board of India (<keyword id="35210" type="General" weightage="20" keywordseo="sebi" source="Orion">SEBI</keyword>) in 2013 to help investors make informed investment decisions. In 2021, SEBI made some changes to the riskometer to improve its accuracy and transparency. The riskometer is based on a six-level scale, from low to very high, with each level represented by a different colour. <cmsannotation type="cmsannotation" annotationid="What the riskometer signifies" comment="Subhead" text="What the riskometer signifies">What the riskometer signifies</cmsannotation> The riskometer is calculated based on a number of factors, including the type of assets that the mutual fund invests in, the fund's volatility, and the fund's credit quality. “To assess the quality of a system, an average retail investor usually has little knowledge of risks because he is not familiar with them. Therefore, in order not to take unnecessary risks with his portfolio it is wise for them to examine the risk indicator,” says Mukesh Kochar, national head, Wealth, AUM Capital, a wealth management firm and mutual fund distributor. According to the riskometer, there are six levels of risk. <ul><li>Low </li><li>Moderately Low </li><li>Moderate </li><li>Moderately High </li><li>High </li><li>Very High </li></ul><cmsannotation type="cmsannotation" annotationid="How to use the riskometer" comment="Subhead" text="How to use the riskometer">How to use the riskometer</cmsannotation> When choosing a mutual fund, it is important to consider your own risk tolerance and investment goals. If you are a conservative investor, you may want to choose a fund with a low or low to moderate riskometer rating. If you are a more aggressive investor, you may want to choose a fund with a moderate to high or high riskometer rating. It is also important to remember that your risk tolerance may change over time. As you get older, you may become more conservative and want to reduce your risk exposure. Conversely, if you are young and have a long investment horizon, you may be more willing to take on risk. When investing in a mutual fund scheme, the investment horizon is very important. “Their investment horizon and the funds chosen for investments should be aligned. Short term investments should be allocated to low risk products, while long term investments may have a moderate or high risk rating,” says Kochar. Pankaj Kumar, Partner at Alpha Capital, a wealth management firm, agrees, “If your <keyword id="6133603" type="General" weightage="20" keywordseo="time-horizon" source="Orion">time horizon</keyword> is short, say one or two years, you should not go with a high amount of risk, because if a market turmoil happens you may end up losing money. But if you have a very long tenure then it makes sense to look into funds with higher risk.” says Kumar. <cmsannotation type="cmsannotation" annotationid="The riskometer is a starting point" comment="Subhead" text="The riskometer is a starting point">The riskometer is a starting point</cmsannotation> “ The riskometer is the same for almost all the equity funds. You cannot have large cap funds and small cap funds under the same category. There should be some amount of bifurcation among them,” says Kumar. The actual risk associated with a mutual fund can vary based on various factors, including the prevailing market conditions and the investment approach of the fund manager. Hence, it is essential for investors to thoroughly review the fund's prospectus before making an investment decision. “At this stage the riskometer is treating large cap or sector funds as equal at risk, which is not correct. So that's not the full proof, it's just a step in the right direction,” says Kochar. Once you have narrowed down your choices, take some time to research different mutual funds. Read the prospectus and compare the fees, performance, and risk rating of different funds. A financial advisor can help you assess your risk tolerance and choose the right mutual funds for your investment goals.

Riskometer: Your guide to choosing the right mutual fund

<ul><li><keyword id="35210" type="General" weightage="40" keywordseo="sebi" source="Orion">Sebi</keyword> mandated labeling of ‘risk’ that a mutual fund scheme carries so that investors know what is in store.</li><li>Axis MF survey finds that investors are oblivious of what the risk-o-meter is all about.</li><li>An overwhelming 66% want to understand what the risk-o-meter is all about. </li></ul> Nearly a decade ago, the markets regulator mandated mutual fund houses to label their schemes such that investors would be told upfront about the quantum of risk the scheme carried. Under these rules, <keyword id="6357979" type="General" weightage="50" keywordseo="mutual-funds" source="Orion">mutual funds</keyword> display a risk-o-meter on all their schemes so that investors are fully informed on the downsides of the scheme. The higher the score, the greater at risk is the capital. A decade after the Securities and Exchange Board of India, investors are not even aware of this feature. Axis Mutual Fund conducted an investor survey to ascertain ‘Risk Comprehension’ amongst Indian investors. The survey received responses from over 1700 Axis MF investors from across the country. The objective of the survey was to receive insights on investors’ attitude and understanding of risks in mutual fund investing. As high as 61% of the respondents were not aware of what risk-o-meter indicates. Only 16% of the total respondents who were aware of a ‘<keyword id="2831405" type="General" weightage="80" keywordseo="riskometer" source="Orion">Riskometer</keyword>’ and that it indicated ‘Fund’ risk, claimed to check the ‘Riskometer’ before making an investment. An equally large number – 66% respondents – said that they would like to understand more about the risk-o-meter and its importance in making informed decisions. Commenting on the inferences drawn from the survey, B Gopkumar, MD &amp; CEO, <keyword id="55941" type="General" weightage="20" keywordseo="axis-amc" source="Orion">Axis AMC</keyword> said: “The mutual fund industry is at an interesting inflection point today, underscored by the increasing influx of investors in the category. While we continue to grow as an industry, enabling investors to make informed investment decisions is also our responsibility. To that end, this survey was conducted to get insights on investor’s understanding of risk, and awareness of the tools available to investors to assess risks associated with mutual fund investments.” The survey findings revealed several interesting patterns. However, 59% investors still consider past performance as one of the key benchmarks for investing in mutual funds. Oftentimes, mainly influenced by market noise, investors tend to redeem their investments even though they are aware of the importance of long-term investing and the power of compounding. According to data by AMFI, 22.2% equity investors stay invested for 12-24 months and in total 48.7% equity investors redeem their portfolio within two years or less. Even though 89% investors believe that understanding ‘risk appetite’ plays a role in choosing the right mutual fund, only 27% investors said that they actually took their risk appetite into consideration before investing. In fact, the survey reveals that 53% investors are not very confident of personal risk assessment while choosing a mutual fund. It is imperative to understand that each investor has a different risk appetite based on his/her investment profile, financial goal, and needs. Furthermore, investments are still largely ‘behaviourally’ influenced, making it even more important to shape this attitude into an aware, educated, and well-informed skill set. The survey found 27% respondents took risk appetite into account while investing, but 64% were not aware of risk profiler as a tool to evaluate risk appetite and of the total survey respondents, only 30% of respondents were aware of Risk Profiler. This indicates that investors know the importance of risk profiling but might not be aware of ‘Risk Profiler’ as a tool for assessing personal risk, leading to a potential mismatch between personal risk and that of the fund. Only 12% of the total respondents who were aware of a ‘Risk Profiler’ claimed that they were either confident or somewhat confident in assessing their risk-taking ability.

Six in ten respondents not aware of what risk-o-meter indicates in a mutual fund, finds Axis MF’s survey

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Riskometer: Your guide to choosing the right mutual fund

Anagh Pal

Six in ten respondents not aware of what risk-o-meter indicates in a mutual fund, finds Axis MF’s survey

BI India Bureau

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