SEBI's new Riskometer is inconsistent and oversimplified!

Published: July 7, 2015 at 8:32 am

Last Updated on

From 1st July onwards, SEBI has instructed all amcs to use a riskometer to help investors understand the risk associated with a particular mutual fund. A look at how useful this really is.

The old riskometer

This is how the old risk dial looked (picture courtesy: HDFC amc).


Three settings, each denoted by a color, like a signal. Guess they did not want to use red for brown and green for yellow!

The new riskometer

The new risk dial has 5 settings for the principal, and is in black and white! I have removed the needle in the image below.


Before we look at specific examples, here are some general criticisms.

1) This riskometer does not help goal-based investing!

Those who recognise the importance of beating inflation for long-term goals will/should ignore this setting for equity funds.


The setting is meant to warn investors who wish to use equity funds for short durations.

The point is, the riskometer (terrible name) makes no effort to differentiate between risk and volatility.

The recommend investment duration should be mentioned in the dial setting.

2) How do I differentiate between low and moderately low?

If we define loss from 0% to 100%, then each segment of the above dial is 20% in width.  So does this mean, a 10% risk is low and 30% risk is moderately low?

These divisions are purely subjective. They will claim that they are only indicative. That is more of an excuse.  Product labelling cannot be simplified for the sake of simplification.

3) The labelling appears to be misleading

According to Franklin Templeton,

Franklin India Prima Fund, a mid and small cap fund has

Moderat High

Bluechip and Prima plus also have the same labelling! FT Balanced also has the same label.

So from what I see (at the FT site), all diversified equity funds, including balanced funds are labelled moderately high

Sector funds (concentrated risk) and those that invest in international stocks (currency fluctuations add to the risk) are high

A fund like Franklin India Opportunities Fund which can take concentrated stock or sector exposure is also labelled as moderately high!

All funds labelled moderately high were earlier coated brown (high risk). What has changed now that their risk profile can be downgraded?

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

At the time of writing ( 5:40 pm July 5th 2015), HDFC had still not bothered to comply with the SEBI deadline of 1st July.

Now have a look at this. DSP BR says their  Monthly Income Plan fund with only 25% max exposure to equity is also labelled as moderately high.


Franklin says its MIP fund is moderate! God help the investors who take this riskometer too seriously.

However, Franklin’s Pension plan which can have up to 40% in equity is labelled moderately high.

The riskometer has no correlation wrt equity exposure in a fund.

By now, it should  be clear to most of you that long-term gilts funds would be labelled as


Dynamic bond funds also fall in this category.

In an earlier post, The key to successful mutual fund investing, I had shown how mutual fund categories can be classified in terms of standard deviation.

This is a plot of 3-year return divided by 3-year standard deviation versus the standard deviation.


Notice that both the x- and y- axis are logarithmic. Only then do the categories line up.

That is, risk is logarithmic and not linear!

The risk associated with a long-term gilt fund can, and should never be placed next to diversified equity funds.

There is a huge gulf in risk between them. The riskometer which is linear (a line placed on a semi-circle) can never capture this.

The previously used color codes also suffered from the same flaw, but somehow that seems better than the new system!

It just gets better and better!

Franklin’s Ultra Short Term Bond fund an accrual based debt fund is labelled moderate!! Unless the investment duration for which the label is valid is mentioned, it makes no sense.

I could go on and on. By now, I hope it is clear to you that this riskometer is more of a legal disclaimer for amcs rather than an aid for investors.

Do not try to reconcile it with VR fund categories. From what I see it is too dependent on fund strategy.

Labelling will work only if it is consistent across a product category. First let SEBI come with a product categtorization. Only then will this labelling work.

Do not take it or anyone who shows  it to you seriously. Please do your own research and choose products suitable for your financial goals.

Ps. Since gold is risker than stocks, guess how gold funds and gold etfs are labelled 🙂

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps