If you are already an investor of the mutual fund, then you may be familiar with the color coding of mutual fund schemes based on the risk involved. Such color-coding based on risk is called Product Label. However, effective from July 01, 2015, SEBI implementing a new Product labeling called Riskometer. Let us look into it.
First look at the earlier color coding or product labeling procedure.
You notice that all mutual fund categories are divided among three categories. Blue with low risk, yellow will be at medium risk and brown at high risk. You may notice this color coding when you go through the Mutual Fund Scheme Information Document (SID).
In my earlier post, I pointed that classifying funds only within 3 categories is not good. Because, Debt funds with longer maturity holdings are equally volatile like equity funds. To provide more clarity of risk, SEBI now come up with product labeling in 5 types than earlier 3 categories. Earlier color coding is now replaced with a new pictorial meter called “Riskometer”. These below categories are as below.
- Low-Principal at low risk.
- Moderately Low-Principal at moderately low risk.
- Moderate-Principal at moderate risk.
- Moderately High-Principal at moderately high risk.
- High-Principal at high risk.
For example, a scheme of moderate risk looks like below in newly implemented riskometer.
Implementation of this new riskometer will be applicable from July 01. 2015.
Will it really give you any indication while selecting funds?
To the certain extent, yes, you can judge the risk involved. However, while investing in mutual funds, how many of us go through the Mutual Fund SID (Scheme Information Document)? Because it consists of many pages and confuse the new investors? Hence, chances are high that you may miss this Riskometer.
I feel it is a good move that now the classification is moved from 3 to 5. However, investing blindly by following this riskometer is not at all right strategy. You have to analyze the risk and return for whatever category of funds you are investing.
Hence, I suggest you not to depend on this Riskometer only and select the fund. It just gives you a simple glimpse of risk, but not an in-depth.