Can fixed-income investors rely on the risk-o-meter while deciding to invest? How should they use the new risk-o-meter?
Yes, I think in the case of fixed-income funds, the risk-o-meter will become more useful. Everybody looks at fixed-income funds primarily with one yardstick, which is their returns. But that hides a lot of risks. Also, if you're just guided by the returns, then you may be buying into a risky fund and may not be aware of it. I hope now you will have this risk-o-meter which will clearly differentiate among fixed-income funds based on their riskiness.
For debt funds, the risk factors under consideration will include credit risk, interest-rate risk and liquidity risk. These are real risks and we have seen how six Franklin funds got stuck because of the lack of liquidity in the market. Additionally, we have already seen how a lot of funds have been hit by credit risk. As for the interest-rate risk, this is something which is coming our way, as interest rates may see a rise in the coming one year. Subsequently, many funds may actually decline in value because of the inverse relationship of NAV of debt funds with the interest rates. We'll see how the funds navigate the interest rates, which are able to better manage their maturity profile and the liquidity of underlying securities.
So, I would say yes, in fixed-income funds, the risk-o-meter is going to become very meaningful and investors will start looking at it. So far, fixed risk labels were assigned to particular categories and each fund in that category was simply assigned that risk label. But funds of the same category differed noticeably on risks. Now the distinction among funds will become clearer and investors can actually monitor it, as AMCs need to update it every month. So, now an investor will be able to monitor both the return and the risk.
With regard to the second question, if you find that your fixed-income fund has moved to 'moderately high' from 'moderately low', then it is time for you to worry. You can visit Value Research online, set up your portfolio and keep track of such changes. You can find the risk-o-meter in our fund listings and the fund pages.