SEBI making riskometer ‘true to its label

Lately, the Securities & Exchange Board of India (SEBI) is trying to fix a lot of things in the mutual fund space. We have seen the same happening in the multi-cap space, where it made them stick to its true label of investing across market cap rather than acting like a large-cap or large and mid-cap fund.

Further, SEBI has put forth detailed guidelines pertaining to the positioning of a mutual fund on its riskometer tool. With this, it also introduced a new risk category i.e. ‘very high’ risk. This new system replaces the old model, where it simply followed a scheme’s category without effectively considering the fund’s actual portfolio for determining risk.

These changes would come into effect on January 1, 2021.

Having said that, mutual funds now need to update the riskometer on a monthly basis on their’s as well as on Association of Mutual Funds in India’s (AMFI) websites and that too, within 10 days from the end of the month. Further, any change in the position of the fund on riskometer needs to be communicated to investors. Also, mutual funds require publishing the riskometer’s historical changes every year.

Under the new riskometer system, SEBI has introduced six categories of risk ranging from low to very high. Debt mutual funds having lower credit-rated or higher maturity papers will be considered as riskier. Whereas, for equity funds, higher risk weights will be attached to small-cap and mid-cap stocks, which in turn, means a riskier place on the new riskometer tool. SEBI circular also brings in a liquidity parameter for both the equity and debt funds, where it assigns higher weights to the schemes holding relatively illiquid securities.

The new system brings in more clarity and also helps the investors in making better decisions by understanding risk with the help of the new riskometer. With this, SEBI has made riskometer to be ‘true to its label’.