Mutual Fund Riskometer: What It Means and How Investors Can Use It
Two mutual fund schemes can have very different risk characteristics. The Riskometer gives investors a standardized starting point for understanding a scheme's risk before investing.
What is the Mutual Fund Riskometer?
The Riskometer is a standardized risk-labelling framework for mutual fund schemes in India. It communicates the level of risk associated with a scheme in a simple visual form. It should be considered alongside the scheme objective, portfolio, investment horizon and other disclosures.
The six Riskometer levels
| Risk level | What the label indicates |
|---|---|
| Low | Principal at low risk. |
| Low to Moderate | Principal at moderately low risk. |
| Moderate | Principal at moderate risk. |
| Moderately High | Principal at moderately high risk. |
| High | Principal at high risk. |
| Very High | Principal at very high risk. |
Why can schemes have different risk levels?
Mutual funds may invest in different combinations of equity, debt and other securities. Risk can be influenced by the assets held and the strategy used. Equity schemes, for example, can be volatile in the short term, while the risk of hybrid schemes depends partly on their asset allocation.
Riskometer and your investment horizon
Investment horizon matters because short- and long-term goals have different capacities to absorb market fluctuations. A longer horizon can provide more time to experience market cycles, but it does not remove risk.
Riskometer and SIPs
Investing through a Systematic Investment Plan does not change the underlying risk classification of a mutual fund scheme. A SIP changes the manner and timing of investment; it does not convert a high-risk scheme into a low-risk one or guarantee returns.
How to use the Riskometer before investing
- Define the financial goal.
- Identify when you are likely to need the money.
- Consider your willingness and financial ability to tolerate fluctuations or losses.
- Check the scheme's current Riskometer level.
- Read the scheme objective and related documents rather than relying on the label alone.
- Consider how the scheme fits your overall portfolio.
- Review the current risk disclosure periodically.
Risk capacity and risk tolerance are not the same
Risk tolerance is how comfortable you feel with fluctuations. Risk capacity is how much financial loss or volatility your circumstances can actually absorb without compromising an important goal. Both deserve consideration.
Common mistakes to avoid
- Assuming past returns tell you everything about future risk.
- Selecting a scheme only because it recently produced high returns.
- Assuming SIP investing eliminates market risk.
- Ignoring the time remaining before a financial goal.
- Treating “Low” as equivalent to guaranteed or capital-protected.
- Looking at one scheme without considering the overall portfolio.
Frequently asked questions
Does “Very High” mean a fund will lose money?
No. The Riskometer communicates risk level, not a prediction of future returns.
Does “Low” mean my money is guaranteed?
No. Mutual fund schemes are not guaranteed or assured-return products.
Can the Riskometer level change?
Yes. Scheme risk is evaluated periodically, so investors should review current disclosures rather than relying only on the level seen when they first invested.
Connect risk with your goal
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FundDisha is a Mutual Fund Distributor – ARN 288444. This article is for investor education and general information and is not an assurance or guarantee of investment returns.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.