The Securities and Exchange Board of India (Sebi) has introduced detailed guidelines for determining the place of a mutual fund on its riskometer tool. The new system introduces a fresh category of ‘very high’ risk. It replaces the old model based simply on a scheme’s category without adequately considering its actual portfolio. The circular goes into effect on 1st Jan 2021. Mutual Funds have to update the riskometer on a monthly basis on their websites and the AMFI website, within 10 days from the end of the month. In case of a change in riskometer position, they have to send out communications to investors. Mutual Funds also have to publish a history of riskometer changes every year.
Separately, Sebi introduced labelling norms for the dividend options of mutual funds which will come into effect from 1st April 2021. Under the new norms, mutual funds will have to rename dividend options as income distribution cum capital withdrawal.
There is a need to clearly communicate to the investor that, under dividend option of a Mutual Fund Scheme, certain portion of his capital can be distributed as dividend, the regulator said. Dividends can be distributed from the realised gains of mutual funds current under Sebi rules.
Under the new riskometer, there are six categories of risk, going from low to very high. Debt schemes with lower rated credit or higher maturity papers will be determined as more risky. For equity schemes higher risk weights will be given to small and mid cap stocks (meaning a riskier place on the riskometer tool). The new Sebi circular also introduces a liquidity parameter for both equity and debt schemes, assigning higher weights to schemes investing in relatively illiquid securities. “Many key changes have been introduced. Now investors will be able to distinguish between the risk of funds within a category. The monthly publishing also makes it a dynamic tool. An additional risk category called very high has also been introduced. All these changes are welcome,” said Swarup Mohanty, CEO, Mirae Asset Mutual Fund.
Financial advisors took a favourable view of the new system. “This is a good change and will bring about clear risk labelling. Initially it may cause some alarm among investors if a fund’s riskometer changes, but such sentiments will eventually settle down,” said Vijai Mantri, co founder and Chief Investment Strategist at JRL Money. Gaurav Rastogi, CEO, Kuvera, an online mutual fund platform welcomed the transparencyintroduced by the new rules, but added a note of caution from an investor point of view. “While quantitative methods do a good job of risk labelling on the product side, they still fall short on risk labelling of investor appetite,” he said