The dial on every fund document

Every Indian mutual fund’s factsheet, application form and advertisement carries a semicircular dial with a needle — the riskometer. It sorts each scheme into one of six levels: Low, Low to Moderate, Moderate, Moderately High, High, Very High.

It’s easy to read the dial as SEBI’s verdict on how risky a fund is. It’s something narrower: a score computed each month from a checklist of the portfolio’s characteristics, using a formula published by SEBI (the Securities and Exchange Board of India). Once you know the formula, you know both what the dial says and what it structurally can’t.

The rules: SEBI’s circular SEBI/HO/IMD/DF3/CIR/P/2020/197, 5 October 2020, now in paragraph 6.16 and Annexure 10 of its Master Circular for Mutual Funds (20 March 2026). The riskometer is evaluated monthly, published with the portfolio on the fund house’s website and that of AMFI (the Association of Mutual Funds in India) within 10 calendar days of month-end, and any change must be sent to unitholders by email or SMS. Funds must also disclose, every year, how many times each scheme’s level changed. A change in the riskometer is expressly not a change in the scheme’s fundamental attributes (paragraph 6.16.4), so it doesn’t give you a penalty-free exit.

The formula

Every holding gets a score on a few parameters; each parameter is averaged across the portfolio by weight; the averages are combined into one risk value; the risk value maps to a level.

Equity — three parameters per stock:

Parameter Score
Market cap (AMFI’s list) Large cap 5 · Mid cap 7 · Small cap 9
The stock’s own daily price volatility, past two years ≤ 1%: 5 · above 1%: 6
Average impact cost (a measure of how much buying moves the price) ≤ 1%: 5 · 1–2%: 7 · above 2%: 9 
Equity risk value = average of (weighted market-cap score,
                                weighted volatility score,
                                weighted impact-cost score)

Debt — credit rating (government securities and AAA score 1, stepping up to 12 for below investment grade), interest-rate risk from the portfolio’s Macaulay duration (1 for six months or less, up to 6 for more than four years), and a liquidity score (1 for government securities and TREPS — tri-party repos, overnight lending secured by government bonds — rising for lower ratings, unlisted paper and special structures):

Debt risk value = average of (credit, interest-rate, liquidity scores)
                  — or the liquidity score alone, if it is higher than that average

Cash scores 1. Hedged positions (a share plus the future sold against it) are left out entirely, which helps explain why an arbitrage fund scores low. Mixed funds add up the weighted parts. Then:

Risk value Level
≤ 1 Low
> 1 to ≤ 2 Low to Moderate
> 2 to ≤ 3 Moderate
> 3 to ≤ 4 Moderately High
> 4 to ≤ 5 High
> 5 Very High

Worked example: three equity funds and a debt fund

All four portfolios are hypothetical, and each equity one is fully invested (no cash), which keeps the arithmetic unambiguous.

Fund A — 100% in large caps, every one with daily volatility of 0.9% and tiny impact cost.

  1. Market cap: 1.00 × 5 = 5
  2. Volatility: 1.00 × 5 = 5
  3. Impact cost: 1.00 × 5 = 5
  4. Risk value = 5 → High

Fund B — the same, except 10% of the fund sits in large caps whose daily volatility is 1.2% instead of 0.9%.

  1. Market cap: 5 (still all large caps)
  2. Volatility: 0.90 × 5 + 0.10 × 6 = 5.1
  3. Impact cost: 5
  4. Risk value = (5 + 5.1 + 5) ÷ 3 = 5.033 → Very High

Fund C — 40% large caps, 35% mid caps, 25% small caps, all with daily volatility above 1%, and the small caps harder to trade.

  1. Market cap: 0.40 × 5 + 0.35 × 7 + 0.25 × 9 = 6.7
  2. Volatility: every holding above 1% → 6
  3. Impact cost: 0.75 × 5 + 0.25 × 7 = 5.5
  4. Risk value = 6.067 → Very High

Look at what just happened. Fund A and Fund B are nearly identical portfolios and sit on different levels. Fund B and Fund C are very different portfolios — one all large caps, one a quarter in small caps — and sit on the same level.

The reason is the floor. The lowest score an equity holding can get on every parameter is 5, so a fully invested equity fund can’t score below 5 — the top of “High” — and a single holding that scores above 5 on anything (a mid cap, a stock with daily volatility above 1%, a thinly traded share) tips it into “Very High”. For scale, the Nifty 50 index fund used in this series had daily volatility of 0.87% between 1 April 2024 and 31 March 2026 — and that’s a diversified index. Individual stocks swing more than the index that contains them, and the riskometer scores each stock’s own volatility, not the portfolio’s. In our reading of this arithmetic, that’s why almost every equity fund’s needle points to Very High.

Debt fund — 40% government securities, T-bills and TREPS; 40% listed AAA bonds; 20% listed AA bonds; portfolio Macaulay duration 2.4 years.

  1. Credit: 0.4 × 1 + 0.4 × 1 + 0.2 × 3 = 1.4
  2. Interest rate (duration over 2 and up to 3 years): 4
  3. Liquidity: 0.4 × 1 + 0.4 × 2 + 0.2 × 4 = 2
  4. Average = 2.467; liquidity (2) isn’t higher, so the risk value is 2.467 → Moderate

Here the dial does useful work. Keep the same bonds but cut the portfolio’s duration to 0.9 years, and the interest-rate score drops to 2. The average falls to 1.8 — but now the liquidity score (2) is higher than the average, so the liquidity rule sets the risk value at 2, and the level drops to Low to Moderate. Debt funds spread across the six levels in a way equity funds can’t.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Imagine a spiciness meter for curries that only checks each ingredient on its own. A mild chilli scores 5. A hot chilli scores 6. Anything with 5 or less is “Hot”; anything over 5 is “Very Hot”.

Every curry in the equity kitchen is made of chillies. One slightly-hot chilli and the curry is “Very Hot”. A curry made entirely of the hottest chillies in the shop is also “Very Hot”. The meter can’t tell those two apart.

And it never actually tastes the curry — it just reads the list of ingredients. Mixing chillies with yoghurt might make the curry milder to eat, but the meter only sees the chillies.

What the riskometer does and doesn’t tell you

It does tell you what kind of assets a fund holds this month, scored the same way for every fund. Its movements are informative: a fund whose level rose over the year changed its portfolio. And for debt funds it separates very short, top-rated portfolios from long or lower-rated ones. Debt funds also carry a separate potential risk class grid (paragraph 6.18, from circular SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/573, 7 June 2021) showing the maximum duration and credit risk the scheme may take — the most a fund can do, not what it holds today. (That grid scores credit the opposite way round — higher numbers mean safer paper — so don’t mix the two scales up.)

It doesn’t tell you:

  • How much the fund could fall. No drawdown enters the formula. The aggressive hybrid fund in the hybrid funds post fell nearly half its value in 2008; the index fund fell more. The dial for a fully invested equity fund can’t express the difference between a 30% fall and a 60% one.
  • Anything about diversification. Scoring each stock’s own volatility and averaging means fifty stocks score the same as five of the same kind. The diversification post explained why the portfolio’s risk depends on how its holdings move together — something this formula doesn’t look at.
  • Next month. It’s a snapshot of month-end holdings, published after the month closes.
  • Whether it suits you. The dial scores the product. Your horizon and what else you own aren’t in it.

Common mistakes

  • Reading “Very High” as a warning to avoid a fund. For a fully invested equity fund it’s close to the default, not a special alarm. What matters is how you’d cope with the falls equity funds have, which the drawdown post measured.
  • Comparing two equity funds by their dial. They’ll usually show the same level. Compare their holdings, volatility and drawdowns instead.
  • Assuming the dial is fixed. It’s recomputed monthly. A fund that was “Moderately High” when you bought it can be “Very High” today, and a change doesn’t come with an exit window.
  • Treating a low reading as “safe”. A debt fund at “Low to Moderate” still holds bonds that can be downgraded — which is where the side-pocket rules come in, covered in the segregated portfolios post.

Takeaway: The riskometer is a monthly score of a fund’s holdings — market cap, each stock’s own volatility and liquidity for equity; rating, duration and liquidity for debt — mapped onto six levels. It’s useful for debt funds and nearly blind among equity funds, because a fully invested equity fund can’t score below High.