What is Riskometer in Mutual Fund?

6 mins read
by Angel One
The Mutual Fund Riskometer, visually categorises mutual funds based on risk levels, aiding investors in making informed decisions. It assigns scores to each asset class in the mutual fund scheme.

Investing in mutual funds can be a strategic approach to grow your wealth, but it’s not without inherent risks.  Assessing the potential volatility associated with your investment is crucial for making informed financial decisions. This is where the mutual fund riskometer, mandated by the Securities and Exchange Board of India (SEBI), comes into play. It serves as a clear and concise visual aid designed to help investors grasp the level of risk associated with a particular mutual fund scheme.

What is a Riskometer in Mutual Funds?

A riskometer is a tool that graphically represents a mutual fund’s risk based on AMFI (Association of Mutual Funds in India) guidelines, helping investors assess potential volatility and make informed investment decisions. It assigns a risk score to each asset class withheld within the mutual fund scheme. 

Riskometer’s History

Prior to 2015, categorising riskometer of mutual funds primarily relied on the type of mutual funds, such as equity or debt. This approach had limitations as it didn’t delve into the underlying assets that make up the fund. To address this shortcoming, SEBI introduced the initial riskometer in 2015. This first iteration displayed risk levels through a system of colour-coded boxes with five distinct categories.

Recognising the need for further refinement, SEBI revamped the riskometer in 2020. The current version utilises a meter graphic with six distinct risk levels, providing a more clear picture of a mutual fund’s risk profile. This enhanced riskometer offers investors a better understanding of the potential volatility they might encounter within a specific fund.

Riskometer’s Risk Levels

The SEBI-mandated riskometer categorises mutual funds into six distinct risk levels, each with its own characteristics:

  1. Low: This category includes securities and products including income funds, gilt funds, and fixed maturity plans. These mutual funds are seen to be the safest options, making them appropriate for investors seeking a reliable source of income. 
  2. Moderately Low: This category, coloured in light green includes bonds with short to medium terms. They are considered secure investments and best suited for those who can commit to long-term investing.
  3. Moderate: It means that the principle of the funds in this category is somewhat at risk. Investment vehicles including arbitrage funds, money market funds, and hybrid debt-oriented funds are appropriate for the semi-conservative investor who wishes to maintain a low level of risk while booking respectable gains. 
  4. Moderately High: This category often includes Gold ETFs, index funds, diversified equity funds, and balanced equity-oriented funds. Products with this designation are ideal for long-term wealth creation. Investments made in equities through these funds are associated with the large-cap market and fall under the orange colour range of the meter.
  5. High: The principle of the funds in this category is highly risky. Among the funds that fall under this category are micro-cap, international, sectoral, and thematic funds. Products with this designation are appropriate for investors who are comfortable with the high risk involved in their investment and hope to build money over an extended period of time.
  6. Very High: Here the investor understands that he or she may lose all or a substantial portion of wealth, but is ready to take extremely high risks in order to maximise possible gains in the long run.

Types of Risks in Mutual Fund Measured by Riskometer

The riskometer considers various factors to assess a mutual fund’s risk profile. Here’s a breakdown of some key risks categorised by the type of mutual fund:

1. Equity Funds:

  • Market Risk: This refers to the overall fluctuations in the stock market. Equity funds, by their nature, are heavily invested in stocks. When the stock market experiences a downturn, the value of equity funds can decline significantly.
  • Management Risk: This risk arises from the investment decisions made by the fund manager. Even with a well-diversified portfolio, a poor investment strategy or execution by the manager can negatively impact the fund’s performance.

Read More About What are Equity Mutual Funds?

2. Debt Funds:

  • Liquidity Risk: This refers to the risk that an investor may not be able to easily sell their mutual fund units due to low trading volume.  Debt funds, particularly those investing in less-traded bonds, can be susceptible to liquidity risk. 
  • Interest Rate Risk: Debt funds, especially those with longer maturities, are more sensitive to interest rate movements. When interest rates rise, the value of existing bonds with lower interest rates can go down. 
  • Credit Risk: This is the risk that an issuer of a debt instrument (like a bond) defaults on their repayment obligations. 

Read More About What are Debt Mutual Funds?

3. Other Types of Risks in Mutual Funds:

  • Rebalancing Risk: Risk associated with periodically adjusting the asset allocation within a fund to maintain its target risk profile. 
  • Concentration Risk: This refers to the risk associated with a fund having a significant investment in a limited number of securities or sectors.  If the performance of those specific assets or sectors declines sharply, the fund’s value can be disproportionately affected.
  • Currency Risk: The risk that affects the value of a mutual fund’s investment due to fluctuations in foreign exchange rates.  This risk is particularly relevant for funds that invest in international securities. 
  • Inflation Risk: This refers to the risk where the purchasing power of your investment declines over time due to inflation.  Debt funds, with their fixed returns, can be susceptible to inflation risk if the return on investment doesn’t outpace inflation. 
  • Volatility Risk: This refers to the overall fluctuations in the net asset value (NAV) of a mutual fund.  Both macroeconomic and microeconomic factors may have an impact on such risk.

Benefits of Riskometer in Mutual Funds

  1. Standardised Approach: The riskometer offers a standard and straightforward method to convey the risk level associated with mutual fund schemes. This standardisation allows investors to compare risk levels across different funds, aiding them in making informed investment decisions.
  2. Enhanced Transparency: Mandated by SEBI, the riskometer requires Asset Management Companies (AMCs) to disclose the risk level of each scheme monthly. This transparency fosters trust and clarity between AMCs and investors.

Shortcomings of the Riskometer

  1. Equity Funds Classification: Many equity funds are categorised as ‘Very High Risk,’ which may not accurately reflect their risk profile. Different types of equity funds, like large-cap and sectoral funds, have varying risk levels, yet they receive the same riskometer classification.
  2. Limited Mutual Fund Selection Guidance: While the riskometer aims to standardise risk assessment, it should not be the sole factor in choosing mutual funds. Investors should seek expert advice for a comprehensive selection process.
  3. Neglects Key Risks: The riskometer overlooks certain critical risks, such as concentration risk and the potential for funds to underperform benchmarks. These risks are crucial considerations for investors but are not reflected in the riskometer’s assessment.


While the riskometer is a valuable tool for understanding a mutual fund’s risk profile, it shouldn’t be the sole deciding factor when you invest.  Several other aspects deserve your attention before committing. Expense ratio, performance versus category, performance against a benchmark, assets under management (AUM) , fund manager’s expertise, etc., are some of the additional factors. Investors are required to take their investment goals into account as well. 


How is the Riskometer determined?

The riskometer used in India looks at past volatility, asset allocation, and underlying securities to determine the risk level of mutual funds. It uses a risk scale to classify funds, comprising low to high risk.

Can I solely rely on the Riskometer when choosing mutual funds?

While the Riskometer provides valuable insights into a fund’s risk profile, investors should also consider other factors like their investment goals, time horizon, fund manager expertise, and past performance against benchmarks.

Does the Riskometer account for external factors such as geopolitical events or economic fluctuations?

No, the Riskometer primarily assesses inherent risks within mutual fund schemes. Investors should stay informed about external factors that could impact their investments and adjust their strategies accordingly.