The Riskometer — Useful, and Narrower Than It Looks

The scale runs through six levels: low, low to moderate, moderate, moderately high, high and very high. The level assigned comes from an assessment of the scheme\'s actual holdings against defined parameters rather than from the fund house\'s opinion of itself.

For equity schemes the assessment considers things like the size of companies held and how much the portfolio moves. For debt schemes it considers credit quality, how long the instruments run and how easily they can be sold. A scheme holding lower-rated paper with longer maturities lands higher on the dial than one holding short government securities.

Because it is computed from the portfolio, two schemes in the same category can sit at different levels, which is more informative than the category name alone.

The riskometer is reviewed and disclosed each month, and a scheme\'s level can move as its holdings change.

That is a genuine improvement on a label fixed at launch, because a scheme that drifts towards riskier holdings shows up rather than staying labelled as it was five years ago. Fund houses also have to notify unitholders when the level changes.

So it is worth checking the current level rather than the one you remember, particularly on a scheme you have held for years without looking. A consolidated statement will not show this, but the scheme documents and the fund house disclosures will; our page on the consolidated account statement covers what that document does show.

Three things, and the first is the one that matters most.

Whether the scheme suits you. The dial describes the scheme in isolation. Suitability depends on when you need the money, which the riskometer knows nothing about. A very high risk scheme is entirely reasonable for a fifteen-year goal and entirely wrong for a two-year one, and the label is identical in both cases.

How much you might lose. It is a relative ranking, not a quantification. Nothing on the dial tells you how far a scheme might fall or over what period.

Whether the scheme is any good. Risk level and quality are unrelated. A well-run scheme in a volatile category sits high on the dial, as does a poorly-run one.

Two ways it is genuinely worth reading, and one way it is commonly misused.

As a sanity check against the category. If a scheme described as conservative sits at moderately high, that mismatch is worth understanding before investing. The dial is computed from holdings, so it is harder to dress up than a name.

As a change signal. A scheme you hold moving up the scale means its portfolio has changed. That may be entirely within its mandate and still worth knowing.

The misuse is treating a low reading as safety. Low on this scale means low relative to other mutual fund schemes, not comparable to a bank deposit. A liquid scheme sits low and still carries credit and interest-rate risk, as our pages on liquid funds and debt funds set out.

Alongside the dial you will usually see a sentence stating who the scheme is suitable for, phrased in terms of the objective and the horizon rather than in terms of a person.

That sentence is worth reading more carefully than the dial itself, because it is where the horizon appears. A scheme described as suitable for investors seeking long-term capital appreciation is telling you something the dial cannot: that this is not money for next year.

Both are standardised disclosures rather than marketing copy, which makes them among the more reliable sentences in any scheme document. They are also, in our experience, the two things almost nobody reads before investing.

Which is the only question that decides anything: when do you need this money?

Under three years, no equity scheme is appropriate regardless of where it sits on the dial. Beyond ten years, a high reading is not a warning so much as a description of what you have already accepted by choosing that horizon.

The second question the dial cannot answer is about you rather than the scheme: what would you actually do if this fell by a third? Somebody who would stop should not hold the sharper-moving categories whatever the horizon allows, because a plan you abandon returns nothing.

There is one more thing the label cannot capture, and it is the one that decides outcomes. Two people can hold the same very high risk scheme and end up in completely different places, because one held it through a fall and the other did not. The dial describes the scheme; the outcome depends substantially on the holder.

Our page on how to choose a mutual fund sets out that order, and if you would like to talk through where a particular scheme sits against your own situation, get in touch. We are distributors rather than investment advisers and we recommend no schemes here.