Mutual Fund Riskometer - Measure Level of Risk and Types

Manish Kothari
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Manish Kothari



For the mutual fund industry, SEBI introduced the concept of ‘product labeling’ in March 2013. This move was aimed at assisting the investors to interpret the inherent risk to inculcate with a plan through easy-to-understand color codes. This system used three colors blue, yellow, and brown which depicts different levels of risks. According to this, all fund houses shall display the product label including color boxes which shows the risk level.   

From July 2015, SEBI replaced the depiction of risk through color boxes with a graphical meter called ‘Riskometer’ and this will show the level of risk in any specific plan or fund out of the 5 levels specified by SEBI. Recently, after 5 years, effective from Jan 2021, SEBI updated the riskometer by replacing the 5 levels with 6 risk levels ranging from low to very high so as to depict a better picture. Detailed guidelines for evaluation of different levels of the scheme are also laid by SEBI. 


Investors always look forward to opting for a fund for their portfolio which matched their risk appetite. But the question here is how to know about the risk?
With the help of this riskometer, this can easily be done. From 2013, SEBI mandate all the fund houses and AMCs to mention the product label of the plan in order to specify the risk factors through specific different colors which are as under:

  • Blue: for funds having low risk
  • Yellow: for funds having medium risk
  • Brown: for funds having high risk

The idea behind such labeling was to tell investors the risk level and which fund is best suitable for their requirements. Later, many investors were not able to exactly understand their risk and opt from the three categories and this resulted in two additions in the risk category which were “Moderately Low” and “Moderately High”. Moving forward in 2015, SEBI introduced the new way of describing the scheme’s risk by a graphic meter and in Jan 2021 the very high risk was added to the meter. This meter looks like a car speedometer and every scheme document contains the same. 


The new riskometer consists of six levels of risk, namely: Low, Moderately Low, Moderate, Moderately High, High, and Very High.  

LowConservative The investor wants to protect his capital, willing to take only minimal risks and thus, might receive low minimum returns.Green
Moderately LowModerately Conservative Investors have a slight risk appetite in exchange for some decent returns over the medium to long tenure.Light Green
Moderate Moderate The investor is tolerant to a medium level of risk if relatively high returns can be received. Yellow
Moderately HighModerately Aggressive Investors are having a moderately high-risk appetite in order to maximize potential returns over the medium to long run.Brownish-yellow
High Aggressive Investors are willing to accept significant risks to maximize the returns over the long run and are also tolerant of losses. Orange 
Very High Very AggressiveInvestors are open to very high risks and ready to even suffer loss in exchange for potentially high and excellent returns. Red


The risk level for the plans and funds shall be evaluated on a monthly basis based on the securities in which the fund invests, namely, debt, equity, derivatives, foreign securities among others. As per SEBI mandates, the underlying securities of a scheme shall be assigned a value for the parameters and aspects like, credit risk, volatility, etc. based on which the risk will be ascertained.

  1. The equity securities are evaluated on the basis of the following aspects: Volatility, Liquidity Measure (Impact Cost), Market Capitalization.
  2. For debt securities, the risk is evaluated on the following aspects:

Interest Rate Risk: Based on the duration of the portfolio

Credit Risk: Based on the rating of each security

Liquidity Risk:  Based on Credit Rating, Listing Status, and Structure of Debt instrument. 

3. Other types of aspects through which risk can be evaluated are: 

  1. Currency Risk: Risk arising from the change in the Forex. If the exchange rate decrease, it may result in an increase in returns from the fund.
  2. Volatility Risk: Risk that arises by fluctuations in the NAV of the fund. This risk can be influence by macro and microeconomic factors.
  3. Other risks which can affect include Rebalancing, Inflation, and Concentration risk.


An investor can do the following things when exposed to risk:

  1. You can move to a low-risk fund scheme within the same category. For instance, if you have invested in thematic or sectoral funds, move to multi-cap or large-cap funds.
  2. Diversifying your portfolio by adding funds that were not there previously can help a lot. For example, if you do not have gold, you can allot 5 to 10 percent in gold as it acts as a hedge against inflation, currency volatility and shields the portfolio from the volatility in stock markets.
  3. You can also change the asset class of the fund like moving from equity to balanced or debt funds.


All the fund houses and AMCs previously had to categorize their mutual fund scheme concerning the 5 risk levels and with the recent addition of the sixth head of very high risk, a few high-risk funds with a risk score of more than 5 will be labeled under this category. In contrast, the new rule of monthly evaluating and updating the riskometer in a fund will boost investors’ confidence and motivate them to invest even more than earlier. AMCs will now have to calculate the risk profile of their fund every month, assisting them to maintain and make frequent changes in their portfolio.


While selecting the mutual fund scheme for your portfolio, you must want to go for the one that suits your appetite and requirements. If you have a moderate risk profile and want to take mild exposure to the market volatility, then you can check the risk level of the scheme from the riskometer and select the fund as per the feasibility. Hence, it is very useful for the investors while buying the best-suited and ideal fund for their portfolio.

All the scheme-related documents of the funds showcase the riskometer which will help you in making the ideal choice for your portfolio. Nevertheless, If you feel to take any financial advice for your requirements, then you must get associated with finance professionals and advisors and remain in touch with them so as to make the most informed and intelligent decision.

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