SEBI Proposes Colour-Coded Risk-O-Meter for Mutual Fund Schemes to Simplify Risk Assessment
The Securities and Exchange Board of India (SEBI) has recently issued a consultation paper that proposes the adoption of a colour-coded risk-o-meter for mutual fund schemes. These rules have been proposed on the basis of the recommendations given by the Mutual Fund Advisory Committee with the intention of making the process of assessing the risks of these mutual fund schemes less complicated for investors. According to the prevailing system, therefore, it will be easier for investors to distinguish the various schemes in mutual funds based on the different levels of risk associated with them.
The current risk-o-meter, introduced six months ago for six categories of risk, has been there to facilitate the evaluation of the risk attached to many mutual fund schemes. Now, it is expected that SEBI standardizes it and elevates it to the next level by having colour-coding incorporated as well. This would make the disclosure format friendly and possible for even small investors to assess the risk involved.
Under the plan, six colours are provided for the various risks involved in different mutual fund schemes. The categories and their colours are as follows,
- Low risk: Irish Green
- Low to moderate risk: Chartreuse
- Moderate risk: Neon Yellow
- Moderately high risk: Caramel
- High risk: Dark Orange
- Very high risk: Red
This colour coding is to help an investor, in one glance, immediately tell the level of risk of a scheme. For example, if a scheme has “Very high risk,” it can be coloured red, which would directly indicate the probable volatility and risk involved in such a scheme to the investor.
Besides the colour-coded risk-o-meter, SEBI has proposed that asset management companies should, actively communicate the changes in their schemes’ level of risk to the unitholders. The said communication is to be sent through an email or SMS. The communication should carry with itself the new and old risk-o-meter indicators for evident transparency. This will keep investors abreast of the changes in the risk profile of their investments and take necessary action for the requirement.
The modifications proposed by SEBI are aimed at making the mutual fund investment landscape clear and investor-friendly. SEBI has also simplified the system of risk classification and enhanced communication between AMCs and investors to strengthen investor protection and enable better decision-making.
This consultation paper thus is a signal from SEBI to develop the regulatory framework in a manner that enhances awareness about mutual fund investments. Once this proposal goes through, investors will have a new colour-coded risk-o-meter to guide them in their process of making better-informed, more confident decisions regarding their portfolios of mutual funds.
