Page 11 - mutual-fund-insight - Mar 2021_Neat

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A new scale

This is a recipe for disaster, and or puzzling about them without
often leads to it as recent months understanding your own needs,
have shown us. With the official your own risk tolerance and your
risk meter, at least there will be own financial goals.
some measure of an important This go/no-go problem will be
characteristic of funds that will faced by investors acutely when
have to be officially stated by the the risk level of a fund changes. A
fund company and by distributors. few days back, in an online Q&A
As time goes by, some thorny about Value Research’s star ratings
issues will come up. One will be
to a particular fund, an investor
F or the readers of this that there will be individual cases complained to me that he had
where the system will throw up an
magazine and for the
invested in a fund because it had
members of Value
be a fund that was rated medium or
has now been lowered. I explained
Research Online, there is no need anomaly. At some point there will been rated five stars but that rating
for SEBI’s new risk meter. It does even low risk but it will have some that this was precisely what the
not add anything to the capability problems with credit, liquidity or ratings were for and if we never
you have for evaluating, selecting both. When there are hundreds of changed the ratings, then they
and investing in good funds, or of funds investing in hundreds of would be worthless. However, a
avoiding bad funds. Everything instruments, then over a long Value Research member is used to
that you need, it’s already here in enough period of time, there will be understanding nuances. I worry
our magazines and our website, some such events. How will about what will happen when the
and has been for years. Even for investors react? There will be some risk rating of a large fund falls by a
people who do not specifically use investors in such a fund who have level or two due to some external
our publications and tools but time and money to get into some factor. Could there be a run on the
have good experience or ill-advised legal adventure, as we fund? If there is some change in
knowledge of mutual fund have seen in the Franklin case. the external circumstances, that
investing, there is nothing new What’s more, despite the might lead to a number of large
that the risk meter does. You carefully drafted descriptions of funds simultaneously going up on
already know what it tells you. each rating that SEBI has come up the risk scale? Certainly, that’s
What the risk meter does is to with, it’s hard to translate a risk possible. So, could the very
give a certain evaluation of fund level into a go/no-go decision. So, a existence of the risk-meter system
quality an ‘official’ stamp. Looking fund has medium risk, and another end up causing instability? I don’t
around the world, I do not know of one has medium-to-high risk. In really know, but I suspect that this
any other regulatory regime that every other way, the medium-to- is a question that will have to be
does this. India is unique in this high risk one is better. What should answered at some point.
aspect. The question is, is India you do? Do the other parameters In any case, do read our cover
unique in needing this? I don’t have outweigh the risk-meter reading? story. As you would expect, it’s the
an answer to this. We have a huge How is this to be decided? SEBI most comprehensive bundle of
population of mutual fund cannot decide this for you. You, as knowledge on the risk-meter
investors who do not bother to find an investor, still have the duty to system that you will find anywhere.
out anything about the mutual understand your own needs. As I
funds they invest in except for keep saying, there is little point in Dhirendra Kumar
what the salespeople tell them. understanding the external factors Editor

Mutual Fund Insight March 2021 9
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