Riskometer, the six-band risk scale for mutual funds
The riskometer is a standardised risk-disclosure tool mandated by SEBI for all mutual fund schemes in India, represented graphically as a dial or gauge with six risk bands, Low, Low to Moderate, Moderate, Moderately High, High, and Very High, that communicate the level of risk associated with a scheme’s portfolio to prospective and existing investors. Every mutual fund scheme in India is required to display its riskometer label on the Scheme Information Document (SID), Key Information Memorandum (KIM), fund factsheets, and all scheme advertisements.
Unlike a simplified qualitative label assigned at launch, the riskometer under the current SEBI framework (effective from 1 January 2021) is recalibrated monthly based on the actual portfolio composition, ensuring the displayed risk level reflects the current risk of the portfolio rather than only the broad category risk.
Regulatory evolution
Pre-2021 riskometer (five bands)
The riskometer was first introduced by SEBI in 2015 through Circular CIR/IMD/DF/21/2015 (dated 30 September 2015) with five risk levels: Low, Moderately Low, Moderate, Moderately High, and High. AMCs assigned a risk level to each scheme based primarily on the scheme category and broad mandate. This assignment was largely static once determined at launch and was not updated to reflect portfolio-level changes.
The limitation of the five-band static riskometer was that it conflated category risk with scheme-level portfolio risk. Two schemes in the same category with significantly different portfolios could carry the same label, and a scheme’s label did not change even if its actual portfolio risk changed materially within the permitted investment range.
2021 revision: six bands and monthly recalibration
SEBI’s Circular SEBI/HO/IMD/DF3/CIR/P/2020/197 (dated 5 October 2020), effective 1 January 2021, overhauled the riskometer by:
- Adding a sixth band: “Very High” was added as the highest risk level, above “High.” The former “High” category was split to differentiate between schemes at the top of the risk spectrum.
- Mandating monthly recalibration: AMCs must now compute the riskometer level from the actual portfolio holdings at the end of each month and update the riskometer accordingly.
- Disclosure of change: If a scheme’s riskometer level changes from the previous month, the AMC must notify all investors in that scheme by email or SMS within 30 days.
- Website and factsheet update: Updated riskometer labels must appear on the AMC website and monthly fund factsheet.
The six risk bands
1. Low
The portfolio carries minimal risk of loss of principal or return, typically associated with overnight funds and some liquid funds investing only in government securities and very short-duration AAA-rated instruments with near-zero credit and interest rate risk.
2. Low to Moderate
Marginally higher risk than Low; associated with ultra-short duration and low-duration debt funds with AAA-rated or near-equivalent holdings and slightly longer duration than overnight/liquid funds.
3. Moderate
Medium-level risk, typically applicable to short-duration, money market, and some hybrid schemes. Interest rate risk and limited credit risk contribute to this band.
4. Moderately High
Above-average risk, common in medium-duration and long-duration debt funds, balanced advantage funds with significant equity exposure, and equity savings funds. Both interest rate volatility and equity volatility contribute.
5. High
High volatility expected; applicable to most pure equity schemes (large-cap, flexi-cap, mid-cap) and equity-oriented hybrids with high equity allocation.
6. Very High
The highest risk band; applicable to small-cap funds, sectoral and thematic funds, international funds, and any scheme with concentrated, illiquid, or highly volatile holdings.
Methodology: how the risk level is computed
SEBI prescribes a point-based methodology for computing the riskometer level from portfolio attributes:
For debt schemes
Points are assigned based on two dimensions:
Credit risk points: Based on the weighted average credit rating of portfolio holdings. Higher rated (AAA, A1+) instruments attract lower credit risk points; lower-rated or unrated instruments attract higher points.
Interest rate risk points: Based on the Macaulay duration of the portfolio. Shorter duration portfolios attract fewer points; longer duration portfolios attract more points.
The sum of credit risk and interest rate risk points maps to a riskometer band per a SEBI-prescribed scoring table.
For equity schemes
Points are assigned based on:
- Market capitalisation risk: Percentage of portfolio in small-cap stocks (highest risk) vs mid-cap vs large-cap stocks. Small-cap allocation attracts higher risk points.
- Volatility risk: Based on the historical volatility of individual stocks or sectors in the portfolio.
- Impact cost / liquidity risk: Schemes with illiquid stocks attract additional risk points.
For hybrid schemes
Risk points are computed for both equity and debt portions separately and then combined on a weighted basis based on actual portfolio allocation.
The total risk score maps to one of the six riskometer bands per the published scoring bands in SEBI’s 2020 circular.
Display and disclosure requirements
| Disclosure location | Requirement |
|---|---|
| SID / SAI | Riskometer at time of filing; updated SID filed if riskometer changes |
| KIM | Current riskometer; must be refreshed every six months or on material change |
| Monthly factsheet | Updated riskometer for each scheme |
| All print / digital advertisements | Riskometer label for the advertised scheme |
| AMC website | Scheme pages must show current riskometer and historical changes |
The riskometer is presented as a dial image (specified format in the SEBI circular), with the indicator pointing to the current risk band. SEBI specifies the colours, the label text, and the disclaimer that must accompany the riskometer: “The product labelling assigned during the NFO is based on internal assessment of the scheme characteristics or model portfolio and the actual suitability of the product will be determined after the scheme has actually invested.”
Limitations of the riskometer
Backward-looking metric: The riskometer is computed from the last month-end portfolio. It does not predict future volatility and may lag actual risk changes if the portfolio has changed significantly since the last reporting date.
Intra-category variation ignored: Two schemes in the same riskometer band can have materially different volatility profiles. A “High” equity fund investing entirely in defensive consumer staples will behave very differently from a “High” equity fund concentrated in cyclical sectors.
Category floors may override portfolio reality: Some scheme categories have regulatory minimum equity/debt allocations that constrain how low or high the riskometer can go, regardless of the fund manager’s tactical positioning within those constraints.
No assessment of return potential: The riskometer indicates downside/volatility risk, not expected return. A Very High risk scheme may outperform a Moderate risk scheme over long periods if the equity risk premium materialises.
Credit events not fully captured in real time: For debt funds, credit events (rating downgrades or defaults) between monthly portfolio reports may not be reflected in the riskometer immediately.
Comparison with other risk indicators
SEBI also requires a Potential Risk Class (PRC) matrix for debt mutual fund schemes (introduced via circular SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/573 dated 7 June 2021). The PRC matrix is a 3x3 grid combining interest rate risk (maximum Macaulay duration) and credit risk (minimum credit rating floor) dimensions. The PRC matrix is a structural characteristic of the scheme mandate, not a portfolio-level monthly recalibration. It is displayed alongside the riskometer for debt schemes.
The suitability of MF scheme article covers how investors and advisers use the riskometer alongside other metrics to assess product suitability.
Related articles
- Mutual fund scheme suitability
- Mark-to-market for debt holdings
- SEBI (Mutual Funds) Regulations 1996
- AMFI
- Total Expense Ratio
- NAV, Net Asset Value
References
- SEBI Circular CIR/IMD/DF/21/2015 (30 September 2015), Original five-band riskometer.
- SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2020/197 (5 October 2020), Revised six-band riskometer with monthly recalibration; effective 1 January 2021.
- SEBI Circular SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/573 (7 June 2021), Potential Risk Class matrix for debt funds.
- SEBI Master Circular for Mutual Funds (2024).
- AMFI implementation guidelines on riskometer monthly update process.