SEBI has modified their riskometer defining place for mutual funds and introduced labelling norms for the dividend options of mutual funds which can inherit effect from 1st April 2021.
Mutual Funds riskometer modified to keep up with the current trends
The Securities and Exchange Board of India (SEBI) has introduced detailed guidelines for determining the place of the Mutual funds on its riskometer tool. The new system introduces a supplementary category of ‘very high’ risk. It has replaced the old model based merely on a scheme’s category without appropriately considering its actual portfolio.
The circular goes into effect on 1st January 2021. The Mutual Funds need to update the riskometer monthly on their websites and therefore the AMFI (Association for Mutual Funds in India) website. The updates will be made within ten days of the end of the month.
In any situation where there is a change in the riskometer’s position, the same has to be communicated to the investors promptly. The annual history of fluctuations in the riskometer of the Mutual Funds has to be reported.
Additionally, SEBI introduced labelling norms for the dividend options of mutual funds which can inherit effect from 1st April 2021. As per the new regulations, the mutual funds will need to rename dividend options as income distribution cum capital withdrawal.
There is a requirement to certainly communicate to the investor that, under dividend option of a Mutual Fund Scheme, a specific portion of his capital is often distributed as a dividend, the regulator said. Dividends are often 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 are going to be determined as schemes with higher risk. For equity schemes, higher risk weights are going to 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 are introduced. Now investors are going to be ready to distinguish between the danger of funds within a category. The monthly publishing also makes it a dynamic tool. A further risk category called very high has also been introduced. Of these changes are welcome,” said Swarup Mohanty, CEO, Mirae Asset Mutual Fund.
Financial advisors took an affirmative view of the new system. “This may be a good change and can cause clear risk labelling. Initially, it’s going to cause some alarm among investors if a fund’s riskometer changes, but such sentiments will eventually calm down,” said Vijai Mantri, co-founder and Chief Investment Strategist at JRL Money. Gaurav Rastogi, CEO, Kuvera, a web Mutual Fund platform, welcomed the transparency introduced by the new rules but added a note of caution from an investor point of view.
“While quantitative methods do an honest job of risk labelling on the merchandise side, they still come short on risk labelling of investor appetite,” he said.
SEBI has come up with an in-depth description of risk related to debt, equity and derivatives instruments. This may enhance the risk related information available to investors, and investors can now map their investments based upon their risk profile.