SEBI updates risk-o-meter of mutual funds

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The Securities Exchange Board of India (SEBI) has issued detailed guidelines for renovating the ‘risk-o-meter’ for mutual fund schemes based on the recommendations by the Mutual Fund Advisory Committee (MFAC). Mutual Fund’s risk disclosure just got more clear. The new risk-o-meter will have six levels of risk to which investors are exposed, up from the five mentioned earlier.

Unlike the old framework, within which debt funds were generally considered to be low and relatively low-risk schemes or equity funds were considered to be high risk based on how exposed the principal amount would be, the new framework takes a deeper look at the scheme’s portfolio. For instance, as debt funds are concerned, the new guidelines constitute credit, liquidity, and interest rate risks and risk weights assigned. This formula-driven approach should bring clarity in the declaration of risks associated with mutual fund portfolios.

 The circular mentioned that it is binding on the mutual funds to place the risk-o-meter in application forms, advertisements, and scheme formation documents and the key information memorandum in such a manner that it is remarkably visible. Securities Exchange Board of India (SEBI) has directed fund houses to estimate the risk-o-meter monthly and the same should be disclosed with portfolios of schemes on their respective websites and the Association of Mutual Funds in India(AMFI)’s website within 10 days by the end of each month. Any changes that occurred in the risk-o-meter’s reading shall be communicated through notice cum addendum and by an email or by sending SMS to unitholders.

Although changes in the risk-o-meter won’t be considered in the fundamental attribute of a scheme. These revised principles must be implemented by January 1, 2021. SEBI also asked the fund houses to use the nomenclature ‘income distribution cum capital withdrawal’ instead of the word dividend while defining the plan of the schemes. Therefore mutual funds dividend payout schemes will be renamed ‘Payout of Income Distribution cum capital withdrawal option’. Likewise, dividend reinvestment and dividend transfer plans will be renamed. Financial advisors took a favorable view of the new system and these changes must be executed by April 1, 2021.

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