SEBI introduces 'Riskometer' to show risk levels to principal

Indian securities market regulator, SEBI on Thursday said it has expanded the risk levels of mutual fund schemes to five from three and also introduced pictorial depiction of the risk profiles of the principal in a "Riskometer".

In a circular, the Securities and Exchange Board of India (SEBI) said in consultation with Mutual Fund Advisory Committee, the system of product/scheme labelling has been reviewed.

Accordingly the level of principal at rick in mutual fund schemes has been increased from three to five.

The revised risk levels for principal are low; moderately low; moderate; moderately high; and high.

The SEBI also decided to introduce pictorial depiction with colour codes to denote the principal at risk.

The pictorial depiction on the Riskometer is akin to a vehicle speedometer and would depict to the investor the risk levels of his principal amount.

Meanwhile as a part of risk management practices, the SEBI also stipulated that mutual funds should carry out stress tests on all their liquid fund and money market mutual fund schemes every month and if need arises, tests to be done at more frequency.

The stress tests should measure interest rate risk, credit risk and liquidity and redemption risk.

While conducting stress test, the funds will be required to evaluate impact of the various risk parameters on the scheme and its net asset value (NAV).