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in 2015 with the introduction of to Moderate, Moderate, Moderately price for a fund manager. This is
the risk-o-meter, a pictorial High, High and Very High Risk. referred to as the impact cost. The
depiction of risk on a scale of five, In the new risk-o-meter, the risk higher the impact cost, the higher
ranging from ‘Low’ to ‘High’. In weights are assigned to the the risk value.
this avatar, SEBI fixed the risk underlying securities based on For debt funds, the risk factors
labels for each fund category and specific parameters which are considered are:
each fund was simply assigned the different for different asset classes. Credit risk: This reflects the
same risk label as that of the For equity, each holding in the possibility of a borrower to not
category. But in reality, funds of portfolio will be assigned a risk pay back. As you progressively
the same category differed widely value on the following three move down the credit-rating curve
on risks based on their underlying factors: from AAA to below-investment-
portfolios. For instance, you could Market capitalisation: A small-cap grade securities, this possibility
see huge variations in exposures to stock will have a higher risk value increases and so does the assigned
issuers with low credit ratings than a mid-cap stock, which in risk value.
among different funds and yet the turn will have a higher value than Interest-rate risk: The farther the
risk-o-meter would project them as a large-cap one. maturity of the bonds in a
being equally risky. So, it had little Volatility: Stocks which witness a portfolio, the higher the risk value
use for investors. higher magnitude of ups and on this parameter. That’s because
But the recent misadventures in downs on a day-to-day basis will the prices of long-dated papers
the fund industry prompted SEBI carry a higher risk ranking. react more sharply to the ups and
to significantly upgrade the risk-o- Impact cost (liquidity): Impact cost downs in interest rates. So, if
meter. As per the revised refers to the magnitude by which interest rates increase by 0.25 per
methodology, risk grades are the price of a stock moves as a cent, the bonds whose maturity is
assigned based on the underlying result of a large buy or sell farther away will fall more than
portfolio holdings of a fund. It has transaction. For instance, stocks the ones maturing in the near
also introduced a new risk label: which have low trading volumes term.
‘Very High’. Therefore, a fund can witness a significant jump in their Liquidity risk: This parameter refers
now be assigned one of the price if a big buy order is to the inability to sell a bond
following six risk grades: Low, Low executed, driving up the purchase before its maturity because of a
lack of buyers in the market. The
risk value is assigned on the basis
of a bond’s credit rating, whether
it is listed or not and how it is
structured (for example, whether
or not it carries any credit
enhancement). All these factors
contribute to the liquidity of a
bond.
Besides above, SEBI has
provided detailed guidelines on
assigning risk values to various
other asset classes such as
derivatives, gold, REITs, etc.
Once the risk values are
assigned to the different
parameters, the risk score at the

Mutual Fund Insight March 2021 27
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