Securities and Exchange Board of India
CIRCULAR
October 05, 2020
All Mutual Funds/
Asset Management Companies (AMCs)/
Trustee Companies/Boards of Trustees of Mutual Funds/
Association of Mutual Funds in India (AMFI)
Sir/ Madam,
Subject: Product Labeling in Mutual Fund schemes – Risk-o-meter
1. Please refer to SEBI circular no. CIR/IMD/DF/5/2013 dated March 18, 2013 and CIR/IMD/DF/4/2015 dated April 30, 2015 captioned as ‘Product Labeling in Mutual Funds’.
2. SEBI, based on the recommendation of Mutual Fund Advisory Committee (MFAC), has reviewed the guidelines for product labeling in mutual funds and the following has been decided:
a. Risk Level of a scheme will be depicted by “Risk-o-meter”, as shown below:
b. For example, the risk depicted in the above risk-o-meter is Moderately High
c. Risk-o-meter shall have following six levels of risk for mutual fund schemes:
i. Low Risk
ii. Low to Moderate Risk
iii. Moderate Risk
iv. Moderately High Risk
v. High Risk and
vi. Very High Risk
d. The detailed guidelines for evaluation of risk levels of a scheme along with few examples are provided at Annexure A. Pursuant to calculation of risk value of the scheme portfolio based on the methodology specified in Annexure A, risk level of a scheme as mentioned at Table 11 of Annexure A shall be depicted by risk-o-meter shown above at para 2(a).
e. Based on the scheme characteristics, Mutual Funds shall assign risk level for schemes at the time of launch of scheme/New Fund Offer.
f. Any change in risk-o-meter shall be communicated by way of Notice cum Addendum and by way of an e-mail or SMS to unitholders of that particular scheme.
g. 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 AMFI website within 10 days from the close of each month.
h. Mutual Funds shall 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.
i. Mutual Funds shall publish the following table of scheme wise changes in Risk-o-meter in scheme wise Annual Reports and Abridged summary:
Scheme name | Risk-o-meter level at start of the financial year | Risk-o-meter level at end of the financial year | Number of changes in Risk o-meter during the financial year |
3. Product label shall be disclosed on:
a. Front page of initial offering application form, Scheme Information Documents (SID) and Key Information Memorandum (KIM).
b. Common application form – along with the information about the scheme.
c. The product label with respect to (a) & (b) above shall be placed in proximity to the caption of the scheme and shall be prominently visible.
d. Scheme advertisements – placed in manner so as to be prominently visible to investors.
4. Change in risk-o-meter will not be considered as a Fundamental Attribute Change of the scheme in terms of regulation 18(15A) of SEBI (Mutual Fund) Regulations, 1996.
5. This circular shall be in force with effect from January 1, 2021, to all the existing schemes and all schemes to be launched on or thereafter. However, mutual funds may choose to adopt the provisions of this circular before the effective date.
6. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act 1992, read with the provision of Regulation 77 of SEBI (Mutual Funds) Regulation, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
Yours faithfully,
Deena Venu Sarangadharan
Deputy General Manager
Tel no.: 022-26449266
Email: [email protected]
Annexure A
Risk level of a scheme shall be evaluated using the following methodology:
1. The underlying securities of a scheme shall be assigned a value for each of the parameters based on which the risk-o-meter value will be
2. For the purpose of evaluation of risk level, Assets under management (AUM) of the security forming part of the scheme portfolio shall be as on last day of the given
3. The evaluation of risk parameters are as detailed below:
i. Debt securities
a) Credit Risk
TABLE 1 |
|
Credit rating of the Instrument | CREDIT RISK VALUE |
G-Sec/AAA/SDL/ TREPS | 1 |
AA+ | 2 |
AA | 3 |
AA- | 4 |
A+ | 5 |
A | 6 |
A- | 7 |
BBB+ | 8 |
BBB | 9 |
BBB- | 10 |
Unrated | 11 |
Below investment grade | 12 |
b) Interest Rate Risk
TABLE 2 |
|
Macaulay Duration of the portfolio (years) | INTEREST RATE RISK VALUE |
≤ 0.5 | 1 |
> 0.5 to ≤ 1 | 2 |
> 1 to ≤ 2 | 3 |
> 2 to ≤ 3 | 4 |
> 3 to ≤ 4 | 5 |
> 4 | 6 |
c) Liquidity Risk
TABLE 3 | |
Instrument | LIQUIDITY RISK VALUE |
embedded options* | |
Listed BBB+ rated debt securities without bespoke structures/ structured obligations, credit enhancements or embedded options* | 9 |
Listed BBB rated debt securities without bespoke structures/ structured obligations, credit enhancements or embedded options* | 10 |
Listed BBB- rated debt securities without bespoke structures/ structured obligations, credit enhancements or embedded options* | 11 |
AAA rated debt securities with any one of the following features*-
|
3 |
AA + rated debt securities with any one of the following features*-
|
4 |
AA rated debt securities with any one of the following features*-
|
5 |
AA- rated debt securities with any one of the following features*-
|
6 |
A+ rated debt securities with any one of the following features*-
|
7 |
A rated debt securities with any one of the following features*-
|
8 |
A- rated debt securities with any one of the following features*-
|
9 |
BBB+ rated debt securities within investment grade with any one of the following features*-
|
10 |
BBB rated debt securities within investment grade with any one of the following features*-
|
11 |
BBB- rated debt securities within investment grade with any one of the following features*-
|
12 |
AAA rated debt securities with more than one of the following features*-
|
4 |
AA + rated debt securities with more than one of the following features*-
|
5 |
AA rated debt securities with more than one of the following features*-
|
6 |
AA- rated debt securities with more than one of the following features*-
|
7 |
A+ rated debt securities with more than one of the following features*-
|
8 |
A rated debt securities with more than one of the following features*-
|
9 |
A- rated debt securities with more than one of the following features*-
|
10 |
BBB+ rated debt securities with more than one of the following features*-
|
11 |
BBB rated debt securities with more than one of the following features*-
|
12 |
BBB- rated debt securities with more than one of the following features*-
|
13 |
Below investment grade and unrated debt securities | 14 |
*Or any other structure / feature which increase the liquidity risk of the instrument. |
d) 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.
e) For investment by mutual funds in instruments having short term ratings, the liquidity risk value and the credit risk value shall be based on the lowest long term rating of the instrument of the same issuer as shown above (in order to follow conservative approach) across credit rating agencies. However, if there is no long term rating of the same issuer, then based on credit rating mapping most conservative long term rating shall be taken for a given short term rating.
ii. Equity
a) Market Capitalization
TABLE 4 |
|
Market Cap of the underlying security | MARKET CAPITALISATION VALUE |
Large cap | 5 |
Mid cap | 7 |
Small cap | 9 |
b) Volatility
TABLE 5 |
|
Daily Volatility of the Security price (based on the past two years price of the security) | VOLATILITY VALUE |
≤ 1% | 5 |
> 1% | 6 |
If an instrument is traded on multiple stock exchanges, then the most conservative volatility value across stock exchanges for a given month shall be considered.
c) Impact Cost (Liquidity Measure)
TABLE 6 |
|
Average Impact Cost of the Security for the month | IMPACT COST VALUE |
≤ 1% | 5 |
>1 % to ≤ 2% | 7 |
> 2% | 9 |
d) For investment in IPOs or recently listed securities, the following process shall be adopted for arriving at weighted average value for Risk-o-meter:
e) Risk value for equity portfolio shall be simple average of market capitalisation value, volatility value and impact cost value.
iii. Equity Derivatives
iv. Index Futures and Stock Futures
TABLE 7 | |
Value for Index / Stock futures | INDEX / STOCK FUTURES VOLATILITY VALUE |
≤ NIFTY near month futures annualized volatility |
5 |
> NIFTY near month futures annualized volatility |
6 |
v. Index Options and Stock Options
TABLE 8 | |
Value for Index / Stock options | INDEX / STOCK OPTIONS’ IMPLIED VOLATILITY VALUE |
≤ India VIX | 5 |
> India VIX | 6 |
vi. Other derivative instruments
TABLE 9 | |
Daily Volatility of the instrument | VOLATILITY VALUE |
≤ 1% | 5 |
>1% | 6 |
vii. REITs & InvITs
viii. Gold and Gold related instruments:
ix. Foreign Securities
x. Mutual Fund Schemes:
TABLE 10 | |
Risk as per risk-o-meter | Value |
Low | 1 |
Low to Moderate | 2 |
Moderate | 3 |
Moderately High | 4 |
High | 5 |
Very High | 6 |
xi. Cash and Net Current Assets:
4. Risk-o-meter value
TABLE 11 | ||
Risk Value | RISK LEVEL AS PER RISK-O-METER | |
≤ 1 | Low | |
>1 to ≤ | 2 | Low to Moderate |
>2 to ≤ | 3 | Moderate |
>3 to ≤ | 4 | Moderately High |
>4 to ≤ | 5 | High |
>5 | Very High |
5. Illustrations:
In order to illustrate the above process, following are a few illustrations:
A. Debt scheme
TABLE 12 | |||
Securities held by the scheme |
Weight as % of AUM |
Credit rating |
Structure |
A | 10% | AAA – PSU |
No additional feature/structure |
B | 10% | AA- | Unlisted and has structured obligation |
C | 10% | A | No additional feature/structure |
D | 10% | BBB+ | No additional feature/structure |
E | 10% | AA | Has credit enhancement |
F | 10% | AA+ | Is bespoke and unlisted |
G | 10% | A | No additional feature/structure |
H | 10% | AA | No additional feature/structure |
I | 10% | AAA | No additional feature/structure |
J | 10% | TREPS | – |
DEBT- Security A to J
TABLE 13 | ||||
Securities held by the scheme |
Weight as % of AUM |
Credit Risk value |
Interest Rate Risk Value |
Liquidity risk value |
A | 10% | 1 | 1 | |
B | 10% | 4 | 7 | |
C | 10% | 6 | 7 | |
D | 10% | 8 | 9 | |
E | 10% | 3 | 5 | |
F | 10% | 2 | 5 | |
G | 10% | 6 | 7 | |
H | 10% | 3 | 4 | |
I | 10% | 1 | 2 | |
J | 10% | 1 | 1 | |
TOTAL* | 3.5 | 3 | 4.8 |
*Total is calculated as weighted average with weights based on AUM of the instrument in the scheme as under:
TABLE 14 | ||
Parameter | Average | Value |
Credit risk | 0.1 X 1 + 0.1 X 4 + 0.1 X 6 + 0.1 X 8 + 0.1 X 3 + 0.1 X 2 + 0.1 X 6 + 0.1 X 3 + 0.1 X 1 + 0.1 X 1 | 3.5 |
IR Risk | 1 x 3 | 3 |
LR value | 0.1 X 1 + 0.1 X 7 + 0.1 X 7 + 0.1 X 9 + 0.1 X 5 + 0.1 X 5 + 0.1 X 7 + 0.1 X 4+ 0.1 X 2+ 0.1 x1 | 4.8 |
Simple Average | 3.8 |
PORTFOLIO RISK-O-METER VALUE:
B. Equity scheme
TABLE 15 | ||||
Securities held by the scheme |
Weight as % of AUM |
Market Cap |
Volatility | Impact cost |
A | 10% | Large Cap | 0.01% | 0.2% |
B | 10% | Large Cap | 1.5% | 0.3% |
C | 10% | Mid cap | 2.5% | 1.5% |
D | 10% | Mid cap | 1.5% | 1.2% |
E | 10% | Mid cap | 2% | 1.9% |
F | 10% | Mid cap | 1.5% | 1.2% |
G | 10% | Large Cap | 0.005% | 0.7% |
H | 10% | IPO | – | – |
I | 10% | Small Cap | 1.7% | 2.5% |
J | 10% | Cash | – | – |
EQUITY – Security A to I
TABLE 16 | ||||
Securities held by the scheme |
Weight as % of AUM |
Market Cap Value |
Volatility Value |
Impact cost Value |
A | 10% | 5 | 5 | 5 |
B | 10% | 5 | 6 | 5 |
C | 10% | 7 | 6 | 7 |
D | 10% | 7 | 6 | 7 |
E | 10% | 7 | 6 | 7 |
F | 10% | 7 | 6 | 7 |
G | 10% | 5 | 5 | 5 |
H* | 10% | 7 | 6 | 5 |
I | 10% | 9 | 6 | 9 |
TOTAL | 90% | 6.6 | 5.8 | 6.3 |
* Assuming the market cap of the security at the time of listing is falling under Mid cap as per the market cap data published by AMFI, a value of 7 is considered. Volatility value and Impact cost value are considered as 6 and 5 respectively.
TABLE 17 | |||
Parameter | Average | Value | |
Market Cap |
0.1 X 5 + 0.1 X 5 + 0.1 X 7 + 0.1 X 7 + 0.1 X 7 X 7 + 0.1 X 5 + 0.1 X 7 + 0.1 X 9 | + 0.1 | 6.6 |
Volatility Value |
0.1 X 5 + 0.1 X 6 + 0.1 X 6 + 0.1 X 6 + 0.1 X 6
X 6 + 0.1 X 5 + 0.1 X 6 + 0.1 X 6 |
+ 0.1 | 5.8 |
Impact cost value |
0.1 X 5 + 0.1 X 5 + 0.1 X 7 + 0.1 X 7 + 0.1 X 7
X 7 + 0.1 X 5 + 0.1 X 5 + 0.1 X 9 |
+ 0.1 | 6.3 |
Simple Average |
6.2 |
CASH – Component J
PORTFOLIO RISK-O-METER VALUE:
C. Multi asset scheme:
TABLE 18 |
|||||
Type of security |
Securities held by the scheme |
Weight as % of AUM |
Market Cap | Volatility | Impact cost |
Equity | A | 20% | Large Cap | 0.01% | 0.2% |
Equity | B | 10% | Large Cap | 1.5% | 0.3% |
Equity | C | 10% | Mid cap | 2.5% | 1.5% |
Type of security |
Securities held by the scheme |
Weight as a % of AUM |
Credit rating |
Macaulay Duration | Structure |
Debt | D | 10% | A | 2.6 | No additional feature/stru cture |
Debt | E | 10% | AA | 2.1 | No additional feature/stru cture |
Debt | F | 10% | AAA | 2.8 | No additional feature/stru cture |
TREPS | G | 10% | – | – | – |
Gold ETF | H | 10% | – | – | – |
REITS | I | 10% | – | – | – |
Interest rate swap (IRS) | J | -20% |
TABLE 19 | ||||
Securities held by the scheme |
Weight as % of AUM |
Market Cap Value |
Volatility Value |
Impact cost Value |
A | 20% | 5 | 5 | 5 |
B | 10% | 5 | 6 | 5 |
C | 10% | 7 | 6 | 7 |
Securities held by the scheme | Weight as a % of AUM | Credit Risk value |
Interest rate risk value |
Liquidity risk value |
D | 10% | 6 | 7 | |
E | 10% | 3 | 4 | |
F | 10% | 1 | 2 | |
G | 10% | 1 | 1 |
EQUITY- Security A, B and C
TABLE 20 | ||||
Securities held by the scheme |
Weight as % of AUM |
Market Cap Value |
Volatility Value |
Impact cost Value |
A | 20% | 5 | 5 | 5 |
B | 10% | 5 | 6 | 5 |
C | 10% | 7 | 6 | 7 |
–
TABLE 21 | ||
Parameter | Average | Value |
Market Cap | 0.2 X 5 + 0.1 X 5 + 0.1 X 7 | 2.2 |
Volatility Value | 0.2 X 5 + 0.1 X 6 + 0.1 X 6 | 2.2 |
Impact cost value | 0.2 X 5 + 0.1 X 5 + 0.1 X 7 | 2.2 |
Simple Average | 2.2 |
DEBT- Security D, E, F and G
TABLE 22 | ||||
Securities held by the scheme |
Weight as a % of AUM |
Credit Risk value |
Interest rate risk value |
Liquidity risk value |
D | 10% | 6 | 7 | |
E | 10% | 3 | 4 | |
F | 10% | 1 | 2 | |
G | 10% | 1 | 1 |
–
TABLE 23 | |||
Parameter | Average | Value | |
Credit risk | 0.1 X 6 + 0.1 X 3 + 0.1 X 1 | + 0.1 X 1 | 1.1 |
IR Risk | 0.4 x 4 | 1.6 | |
LR value | 0.1 X 7 + 0.1 X 4 + 0.1 X 2 | + 0.1 X 1 | 1.4 |
Simple Average | 1.37 |
GOLD and REITS – H and I
TABLE 24 | |||
Securities held by the scheme |
Weight as a % of AUM |
Risk Value | Value |
H | 10% | 4 | 0.4 |
I | 10% | 7 | 0.7 |
PORTFOLIO RISK-O-METER VALUE: