SEBI has further modified the system of product labeling in mutual funds by its circular dated April 30, 2015 (“Circular”). The Circular, which is to come into effect from July 1, 2015, amends the earlier circular of SEBI, dated March 18, 2013 (“2013 Circular”) which laid down parameters for labeling risk in mutual fund products/schemes. Under the 2013 Circular, 3 (three) levels of risk were associated with schemes of mutual funds, ranging from low, medium and high risk being the maximum, and a colour code that would represent the risk levels for the schemes. The Circular introduces a pictorial meter named “Riskometer” to appropriately depict the level of risk in any specific scheme of mutual funds instead of the colour coding. Further, the levels of risk have also been increased from 3 (three) to 5 (five), namely being low, moderately low, moderate, moderately high and high being the maximum. The Circular allows mutual funds to choose adoption of product labelling of their schemes on the basis of the best practice guidelines issued by Association of Mutual Funds in India.
The changes to the labeling of risks as suggested by the Circular are in furtherance of SEBI’s effort to address the issue of mis-selling of schemes by mutual funds and makes it easier for investors to understand the kind of product/scheme they are investing in and the risks associated with it. The Riskometer should make it easier for investors to identify risks associated with mutual funds in addition to other related factors while assessing investments in mutual funds.