The Securities and Exchange Board of India (Sebi) has announced detailed guidelines for product labelling in mutual funds. Until now there were five categories to measure level of risks in the mutual fund schemes, but now regulator have introduced one more category known as ‘very high risk’. The new guidelines shall be in force with effect from January 1, 2021, to all the existing schemes and all schemes to be launched thereafter.
Sebi, in its circular, stated that “Risk-o-meter shall be evaluated on a monthly basis and Mutual Funds/AMCs shall disclose the Risk-o-meter along with portfolio disclosure for all their schemes on their respective website and on Association of Mutual funds in India (Amfi) website within 10 days from the close of each month.” The fund houses shall also disclose the risk level of schemes as on March 31 of every year, along with number of times the risk level has changed over the year, on their website and Amfi website.
The debt securities of the schemes shall be valued for credit risk and higher the credit rating lower will be the credit risk value. For example, if debt schemes had G-Sec, AAA, DSL or TREPS in the portfolio the credit risk value will be 1, while for AA+ credit risk value will be 2. On the other hand, for unrated and below investment securities credit risk value will be 11 and 12, respectively.
Based on the weighted average value of each instrument (weights based on the AUM), credit risk value of the portfolio shall be assigned.
For such purpose, credit rating of the instrument as on last day of the month shall be considered. Even the interest rate risk shall be valued using Macaulay duration of the portfolio. Sebi has also directed that foe measuring liquidity risk of the schemes, listing status, credit rating, structure of debt instruments is considered.
“Risk value for the debt portfolio shall be simple average of credit risk value, interest rate risk value and liquidity risk value. However, if the liquidity risk value is higher than the average of credit risk value, liquidity risk value and interest rate risk value then the value of liquidity risk shall be considered as risk value of the debt portfolio,” said Sebi.
For equity mutual funds, Risk value for equity portfolio shall be simple average of market capitalization value, volatility value and impact cost value. For example, for largecap market capitalization value would be 5 and for smallcap it would be 9. Even the Impact cost shall be considered as a measure for liquidity. Based on the average impact cost of the security for previous three months including the month under consideration.