Mutual fund advertisements carry a disclosure on risks. Mutual fund schemes were labeled as blue (low risk), yellow (medium risk) and brown (high risk). Ever wonder why? These are indicators that help investors take decisions in line with their risk profile and investment objectives.
Entrenching the practice deeper, capital market regulator Securities and Exchange Board of India has advised to use the riskometer w.e.f. July 1, 2015, as a replacement for colour coding. What does this change mean for investors? Why is risk profiling important? This article answers the two questions in detail.
Under the new system, a 180-degree scale and arrow will be used to help investors take a decision based on their risk appetite. The riskometer will have five categories as opposed to just three earlier:
1. Low - principal at low risk
2. Moderately low - principal at moderately low risk
3. Moderate - principal at moderate risk
4. Moderately high - principal at moderately high risk
5. High - principal at high risk
The new format increases the gradient of risk for profiling mutual fund schemes as the needle moves from low to high risk. The riskometer will be displayed in the scheme information documents, the common application form and advertisements for the scheme.
The Association of Mutual Funds of India has issued broad guidelines to mutual funds to classify the risk profile of funds as follows:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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