Risk in Mutual funds - New Risk number
The unforgettable date for investors
is 23 April. That was the day when the
six-debt schemes were closed and created ripples in the mutual fund debt space.
The lessons we learnt from that episode is very high. The
hidden credit risk was revealed in ultra-short-term funds and short-term funds. Investing based on the name of the scheme has not been
very effective. To address these types of shortcomings, SEBI has issued a
few new orders. This change will come into effect from January 1, 2021. Let us understand it better,
read on
Short comings of Current risk-o-meter
At one point, the
risk is low when we invest money in a debt scheme. Over time, the risk
increases because of portfolio changed done by fund manager, which most
investor is not aware of, and the plan has become a more risky than
perceived. usually investor realizes this
too late. Sometimes it is leading to a big loss. Such details are not visible in the current
risk-o- meter
The next drawback in
the current risk-o- meter classification
is based on type of scheme, like equity,
debt and hybrid plans, Investor believe debt are low risk and equity are
high risk, but in reality some of the debt plans are high risk plans
Changes by SEBI
SEBI is bringing new
changes to address the flaws in the above risk-o- meter
Six types of category in risk-o-meter
The existing risk-o-
meter has five types of division which will become six types in the future. The
new category added is Very high risk
Risk Measurement Number
A new method for
calculating risk number is being introduced in detail for each scheme. The risk
measurement will be calculated for each scheme depending on the bonds and
equities held by the scheme. The final risk measurement number of the scheme
will be calculated by weighed average of individual holing risk numbers in
proportion to the weight it has in the folio.
If this number is low, the risk is low.
The higher the risk number, the higher the risk of the scheme.
Risk Measurement Method
Risk Measurement System in
Bonds
The risk in debt
portions are measured in three modes.
Credit risk - Scale 1-14
Government papers 1
Below investment
grade-lowest 14
Interest rate risk
Macaulay duration
< 0.5 years 1
Macaulay duration
> 4 years 6
Liquidity Risk 1-14 Most detailed Calculation available
Risk Measurement System in
Equity Securities
Market capitalization
Large cap - 5
Small cap - 9
Volatility
Daily volatility in
price < 1%, - 5
Daily volatility in
price >1 %, - 6
Impact Cost
Average monthly
Impact cost < 1%, – 5
Average monthly
Impact cost > 2% - 9
Risk measurement
number for each scheme is made available to the investors every month. The risk
measurement number changes at the end of the year also made visible to
investors.
Benefits
Online portals like
Value research online, Morning star classifies risk in three levels high, low,
and Medium. Within medium category, it is very difficult to know relatively
which is at high risk and which is at less risk. This proposed change by SEBI can help easily
to determine which of the two schemes is the riskier than the other
When we invest in a
scheme, the risk number may be 4, may be after a year if the risk number goes
to 8, we can review and decide, whether to continue the scheme or exit. - in
this way it is very easy to understand the risk and decide on the risk
Finally
This change
increases the transparency of the funds. This will be very useful for
investors. Thanks to SEBI
If you like this story, You can share this article in your social media
Give your feed back here
No comments:
Post a Comment