HomeMutual FundsMutual Fund Risk-O-Meter and Risk Profiler Tool - How to Use?

Mutual Fund Risk-O-Meter and Risk Profiler Tool – How to Use?

Investing in mutual funds can be an exciting journey towards financial growth, but it’s not all sunshine and rainbows. Navigating the world of mutual funds requires you to be aware of the potential risks involved. That’s where the Mutual Fund Risk-O-Meter comes into play. In this comprehensive guide, we’ll break down everything you need to know about this nifty tool, from its purpose to how it functions, and why it’s crucial for your investments. So, let’s dive in and demystify the Mutual Fund Risk-O-Meter!

Rsik O Meter Mutual Fund

Understanding the Mutual Fund Risk-O-Meter

The Mutual Fund Risk-O-Meter is like your financial compass in the world of mutual funds, pointing out the potential hazards and helping you steer clear of them. It’s an essential tool for both seasoned investors and those just dipping their toes into the investment waters.

What is the Mutual Fund Risk-O-Meter?

So, what exactly is this Risk-O-Meter, and why does it sound like a sci-fi gadget? Well, it’s not that fancy, but it’s certainly useful! The Mutual Fund Risk-O-Meter is a rating system designed to assess the level of risk associated with a mutual fund. In simple terms, it tells you how bumpy the ride might be when you invest in a particular mutual fund.

The concept of risk-o-meter was introduced by SEBI from July, 1, 2015. Now, it is mandatory for all fund houses to display a riskometer depicting the five levels of risk. Risk-o-meter can be found on mutual fund brocher as well as AMFI website.

How Does it Work?

Now that you know what it is, let’s delve into how the Risk-O-Meter does its magic:

  • Fund Portfolio Analysis: It examines the investments held by the mutual fund. Are they primarily in stocks, bonds, or a mix of both? The proportion of assets allocated to these different investment types plays a significant role in determining the risk level.
  • Historical Performance: The Risk-O-Meter also considers how the mutual fund has performed in the past. If it has a history of wild fluctuations, it’s likely to receive a higher risk rating.
  • Volatility: Volatility measures the ups and downs in the value of the mutual fund. Higher volatility often equates to higher risk.
  • Expense Ratio: The expenses associated with managing the mutual fund can impact its overall returns. Lower expenses generally translate to a lower risk rating.
  • Credit Quality of Holdings: If a fund holds bonds, the credit quality of those bonds is scrutinized. Lower-quality bonds can increase the risk.
  • Objective and Strategy: The stated investment objective and strategy of the fund are also considered. Some strategies inherently carry more risk than others.

Why Does it Matter?

“But why should I care about this Risk-O-Meter?” you might wonder. Well, here are a few compelling reasons:

  • Risk Tolerance: Your own risk tolerance is a crucial factor in your investment decisions. The Risk-O-Meter helps you align your investments with your comfort level.
  • Diversification: If you have a diversified portfolio with a mix of high and low-risk investments, you can use the Risk-O-Meter to fine-tune it.
  • Setting Expectations: Knowing the risk level of your investments helps set realistic expectations. High-risk funds can deliver high rewards, but they can also result in significant losses.
  • Long-Term Goals: Depending on your financial goals and timeline, you might prefer lower or higher-risk investments. The Risk-O-Meter aids in this decision-making process.

Risk Levels and Their Significance

The Mutual Fund Risk-O-Meter categorizes mutual funds into different risk levels, ranging from low to high. These risk levels are typically represented as stars, with more stars indicating a higher level of risk. But what do these risk levels mean, and how should you interpret them? Let’s break it down:

Low Risk (1-2 Stars)

  • Who It’s For: These funds are suitable for conservative investors who prioritize capital preservation over aggressive growth.
  • Typical Investments: Low-risk funds primarily invest in stable assets like government bonds or blue-chip stocks.
  • What to Expect: Expect steady, but modest returns with minimal fluctuations in the fund’s value.

Moderate Risk (3 Stars)

  • Who It’s For: Investors who seek a balance between growth and stability often opt for moderate-risk funds.
  • Typical Investments: These funds typically hold a mix of stocks and bonds, providing a reasonable compromise between risk and return.
  • What to Expect: You’ll likely experience some ups and downs, but overall, your investments should grow at a reasonable pace.

High Risk (4-5 Stars)

  • Who It’s For: High-risk funds are designed for those willing to take on a substantial amount of risk in exchange for the potential for high returns.
  • Typical Investments: These funds often focus on stocks and may invest in more speculative companies or sectors.
  • What to Expect: Be prepared for a rollercoaster ride. High-risk funds can yield impressive gains but come with a higher chance of significant losses.

Managing Risk with the Mutual Fund Risk-O-Meter

Now that you understand the Risk-O-Meter’s ins and outs, it’s time to put this knowledge to good use. Managing risk effectively is key to a successful investment journey. Here are some tips on how to do just that:

Know Your Risk Tolerance

Understanding your own risk tolerance is the first step. Are you comfortable with market volatility, or do you panic at the slightest downturn? Be honest with yourself, and choose funds that align with your comfort level.

Diversify Your Portfolio

The age-old saying, “Don’t put all your eggs in one basket,” holds true in the world of investing. Diversification involves spreading your investments across different asset classes, reducing the impact of a poor-performing investment on your overall portfolio.

Review Your Investments Regularly

Market conditions change, and so should your investment strategy. Periodically assess your portfolio and make adjustments as necessary. If a fund’s risk level shifts, it might be time to reconsider your investment.

Seek Professional Advice

If the Mutual Fund Risk-O-Meter and the intricacies of investing leave you scratching your head, don’t hesitate to seek advice from a financial advisor. They can provide valuable insights tailored to your financial situation and goals. 

Use Risk Profile Tool

The risk profile tool is a popular option for carrying out risk assessment. A risk profiler is a tool or assessment that helps individuals and investors evaluate their risk tolerance and capacity for taking risks in their financial endeavors. It assists in identifying the level of risk an individual is comfortable with and helps in making informed investment decisions. 

Using Risk Profiler Tools: Step by Step

  1. Identification: Begin by locating a reliable risk profiler tool provided by your mutual fund provider or a trusted financial website.
  2. Personal Information: You’ll be prompted to input personal information, such as your age, income, and financial goals. Be honest in your responses, as the tool relies on this data to assess your risk tolerance accurately.
  3. Risk Tolerance Assessment: The tool will analyze your inputs and determine your risk tolerance level, often categorized as conservative, moderate, or aggressive.
  4. Fund Recommendations: Based on your risk profile, the tool will recommend a list of mutual funds that align with your comfort level. These could include equity funds, debt funds, or hybrid funds.
  5. Review and Selection: Review the recommended funds, and choose the ones that resonate with your financial objectives.
  6. Diversify Your Portfolio: Remember, it’s essential not to put all your eggs in one basket. Diversify your investments across multiple mutual funds to spread the risk.
  7. Monitor and Adjust: Regularly monitor the performance of your investments and make adjustments as needed. Life circumstances change, and your risk tolerance may evolve over time.

FAQs: Your Burning Questions Answered

As we journey through the world of mutual fund risk, it’s only natural that questions arise. Here are some frequently asked questions to provide clarity on this subject.

Is a higher risk rating always a bad thing?

Not necessarily. A higher-risk fund can yield substantial rewards, making it a suitable choice for some investors. It all boils down to your personal risk tolerance and investment goals.

Can a low-risk fund offer good returns?

Yes, low-risk funds can provide steady and reliable returns. While the potential for high growth is lower, they are a safer option for conservative investors.

What’s the ideal mix of low, moderate, and high-risk funds in a portfolio?

The ideal mix depends on your financial goals and risk tolerance. Diversification is essential, but the specific ratio of low, moderate, and high-risk funds will vary from person to person.

Can the Risk-O-Meter change over time for a fund?

Absolutely. Market conditions and a fund’s investments can evolve, causing its risk level to shift. Regularly check your fund’s Risk-O-Meter rating to ensure it aligns with your goals.

Should I rely solely on the Risk-O-Meter when choosing a fund?

While the Risk-O-Meter is a valuable tool, it shouldn’t be your sole consideration. Factors like your financial goals, time horizon, and the fund’s past performance should also play a role in your decision.

Can I switch to a different fund if my risk tolerance changes?

Certainly! As your financial situation or risk tolerance evolves, don’t hesitate to shift your investments to better suit your current needs.


In the vast and sometimes turbulent world of mutual funds, the Mutual Fund Risk-O-Meter serves as your guiding star. It helps you navigate the intricate paths of investing and empowers you to make informed decisions. Remember, understanding your own risk tolerance and staying informed about your investments are the keys to a successful journey in the world of mutual funds. So, whether you’re seeking the safety of low-risk funds, the balance of moderate-risk, or the excitement of high-risk investments, the Risk-O-Meter is your trusted companion.

Investing doesn’t have to be intimidating or overly complex. With the right knowledge and tools, you can confidently chart your course towards financial success. So, embrace the Mutual Fund Risk-O-Meter, and embark on your investment adventure with confidence. The risk may be there, but so are the opportunities for growth and prosperity. Happy investing!

Shitanshu Kapadia
Shitanshu Kapadia
Hi, I am Shitanshu founder of moneyexcel.com. I am engaged in blogging & Digital Marketing for 10 years. The purpose of this blog is to share my experience, knowledge and help people in managing money. Please note that the views expressed on this Blog are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment , tax, financial advice or legal opinion. Please consult a qualified financial planner and do your own due diligence before making any investment decision.
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