Chapter 27: Product Labelling in Mutual Funds

Mutual fund schemes vary widely in their investment objectives, asset allocation boundaries, and underlying risk profiles—ranging from overnight funds investing in sovereign debt to small-cap equity funds investing in high-volatility emerging enterprises.

To prevent mis-selling and help investors select products that match their risk appetite, SEBI introduced mandatory Product Labelling requirements.

Under SEBI guidelines, all promotional materials, Scheme Information Documents (SIDs), application forms, and factsheets must clearly display:

1. The scheme's core investment objective and asset allocation strategy.
2. The recommended investment horizon (short-term, medium-term, or long-term).
3. The standardized pictorial risk indicator known as the Risk-o-Meter.

SEBI replaced the earlier three-color pictorial indicator with a detailed Six-Tier Risk-o-Meter designed to communicate scheme risk with greater granularity:

[ Low ] ---> [ Low to Moderate ] ---> [ Moderate ] ---> [ Moderately High ] ---> [ High ] ---> [ Very High ]

1. Low Risk: Suitable for conservative investors focused on capital preservation (e.g., Overnight Funds, Liquid Funds investing in highest-rated sovereign and corporate debt).
2. Low to Moderate Risk: Carries low volatility with modest duration exposure (e.g., Ultra Short Duration Funds, Money Market Funds).
3. Moderate Risk: Balanced fixed income or conservative hybrid structures with moderate interest rate or credit sensitivity.
4. Moderately High Risk: Balanced Hybrid Funds, dynamic asset allocation funds, or medium-duration corporate bond portfolios.
5. High Risk: Broad-market diversified equity funds (Large Cap Equity, Multi Cap Equity).
6. Very High Risk: The highest volatility tier, encompassing Sectoral / Thematic Funds, Mid Cap Funds, Small Cap Funds, and International Equity Funds.

Risk labelling is an ongoing, dynamic regulatory obligation rather than a static classification:

Dynamic Monthly Evaluation

• AMCs are required to evaluate the risk level of their schemes on a monthly basis based on the actual portfolio held as of the end of each month.
• For debt instruments, risk scores are computed using credit rating quality, modified duration, and liquidity metrics.
• For equities, risk is calculated based on market capitalization, volatility, and liquidity.
• Any change in the Risk-o-Meter level must be communicated directly to unit holders via email and published prominently on the AMC and AMFI websites.

Mandatory Disclosure Documents

Before investing, investors should consult two key disclosure documents:

• Scheme Information Document (SID): The comprehensive legal document containing detailed information on investment strategy, risk factors, fee structures, and fund manager profiles.
• Key Information Memorandum (KIM): A concise, executive summary of the SID that must accompany every physical and digital mutual fund application form.