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TMI BlogProduct Labeling in Mutual Fund schemes – Risk-o-meterX X X X Extracts X X X X X X X X Extracts X X X X ..... . The detailed guidelines for evaluation of risk levels of a scheme along with few examples are provided at Annexure A. Pursuant to calculation of risk value of the scheme portfolio based on the methodology specified in Annexure A, risk level of a scheme as mentioned at Table 11 of Annexure A shall be depicted by risk-o-meter shown above at para 2(a). e. Based on the scheme characteristics, Mutual Funds shall assign risk level for schemes at the time of launch of scheme/New Fund Offer. f. Any change in risk-o-meter shall be communicated by way of Notice cum Addendum and by way of an e-mail or SMS to unitholders of that particular scheme. g. Risk-o-meter shall be evaluated on a monthly basis and Mutual Funds/AMCs shall disclose the Risk-o-meter along with portfolio disclosure for all their schemes on their respective website and on AMFI website within 10 days from the close of each month. h. Mutual Funds shall disclose the risk level of schemes as on March 31 of every year, along with number of times the risk level has changed over the year, on their website and AMFI website. i. Mutual Funds shall publish the following table of scheme wise changes in Risk-o-meter in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age value of each instrument (weights based on the AUM), credit risk value of the portfolio shall be assigned. * The price of debt instrument to be considered for calculating AUM shall include the accrued interest i.e. dirty price. * For the above purpose, credit rating of the instrument as on last day of the month shall be considered. b) Interest Rate Risk * Interest rate risk shall be valued using Macaulay Duration of the Portfolio: TABLE 2 Macaulay Duration of the portfolio (years) INTEREST RATE RISK VALUE ≤ 0.5 1 > 0.5 to ≤ 1 2 > 1 to ≤ 2 3 > 2 to ≤ 3 4 > 3 to ≤ 4 5 > 4 6 * For the above purpose, Macaulay Duration of an instrument as on last day of the month shall be considered. c) Liquidity Risk * For measuring liquidity risk of the schemes, listing status, credit rating, structure of debt instruments is considered. * Liquidity risk of the debt securities shall be valued as follows: TABLE 3 Instrument LIQUIDITY RISK VALUE TREPS/G-Sec/AAA rated PSU/SDLs 1 Listed AAA rated debt securities without bespoke structures/ structured obligations, credit enhancements or embedded options* 2 Listed AA+ rated debt securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancement * embedded options 9 BBB+ rated debt securities within investment grade with any one of the following features*- * unlisted * bespoke structure * structured obligation * credit enhancement * embedded options 10 BBB rated debt securities within investment grade with any one of the following features*- * unlisted * bespoke structure * structured obligation * credit enhancement * embedded options 11 BBB- rated debt securities within investment grade with any one of the following features*- * unlisted * bespoke structure * structured obligation * credit enhancement * embedded options 12 AAA rated debt securities with more than one of the following features*- * unlisted * bespoke structure * structured obligation * credit enhancement * embedded options 4 AA + rated debt securities with more than one of the following features*- * unlisted * bespoke structure * structured obligation * credit enhancement * embedded options 5 AA rated debt securities with more than one of the following features*- * unlisted * bespoke structure * structured obligation * credit enhancement * em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. However, if there is no long term rating of the same issuer, then based on credit rating mapping most conservative long term rating shall be taken for a given short term rating. ii. Equity a) Market Capitalisation * Following values shall be assigned to the security for market capitalisation parameter: TABLE 4 Market Cap of the underlying security MARKET CAPITALISATION VALUE Large cap 5 Mid cap 7 Small cap 9 * The market capitalisation data as published by AMFI on six-monthly basis shall be considered. * Based on the weighted average of the above Market Capitalisation values of each security (weights being AUM of the security), Market Capitalisation Value of a portfolio shall be assigned. b) Volatility * Following values shall be assigned to the security based on its volatility: TABLE 5 Daily Volatility of the Security price (based on the past two years price of the security) VOLATILITY VALUE ≤ 1% 5 > 1% 6 * Based on the weighted average of above volatility values of each security (weights being AUM of the security), Volatility Value of a portfolio shall be assigned. If an instrument is traded on multiple stock exchanges, then the most co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition against which the hedging position has been taken, the excess position shall be included while calculating the risk value. iv. Index Futures and Stock Futures * For index and stock futures, following values are to be assigned: TABLE 7 Value for Index / Stock futures INDEX / STOCK FUTURES VOLATILITY VALUE ≤ NIFTY near month futures annualized volatility 5 > NIFTY near month futures annualized volatility 6 * Based on the weighted average of above values of each security (weights being AUM of the security), the risk value shall be assigned to the portfolio. v. Index Options and Stock Options * For index and stock options, following values are to be assigned: TABLE 8 Value for Index / Stock options INDEX / STOCK OPTIONS' IMPLIED VOLATILITY VALUE ≤ India VIX 5 > India VIX 6 * Based on the weighted average of above values of each security (weights being AUM of the security), the risk value shall be assigned to the portfolio. vi. Other derivative instruments * If the derivative instrument is used for hedging, then the hedging instrument shall not be included for calculating the risk value only if the quantity of derivative instrument is less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same may be depicted in the risk-o-meter: TABLE 11 Risk Value RISK LEVEL AS PER RISK-O-METER ≤ 1 Low >1 to ≤ 2 Low to Moderate >2 to ≤ 3 Moderate >3 to ≤ 4 Moderately High >4 to ≤ 5 High >5 Very High 5. Illustrations: In order to illustrate the above process, following are a few illustrations: A. Debt scheme * Consider a bond scheme category having 10 debt securities with following attributes: * * At the portfolio level, the average Macaulay Duration is 1.41 TABLE 12 Securities held by the scheme Weight as % of AUM Credit rating Structure A 10% AAA - PSU No additional feature/structure B 10% AA- Unlisted and has structured obligation C 10% A No additional feature/structure D 10% BBB+ No additional feature/structure E 10% AA Has credit enhancement F 10% AA+ Is bespoke and unlisted G 10% A No additional feature/structure H 10% AA No additional feature/structure I 10% AAA No additional feature/structure J 10% TREPS - DEBT- Security A to J * Based on the above portfolio, following shall be parameter based valuing of securities held by the scheme: TABLE 13 Securities held by the scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 X 5 + 0.1 X 7 + 0.1 X 7 + 0.1 X 7 + 0.1 X 7 + 0.1 X 5 + 0.1 X 7 + 0.1 X 9 6.6 Volatility Value 0.1 X 5 + 0.1 X 6 + 0.1 X 6 + 0.1 X 6 + 0.1 X 6 + 0.1 X 6 + 0.1 X 5 + 0.1 X 6 + 0.1 X 6 5.8 Impact cost value 0.1 X 5 + 0.1 X 5 + 0.1 X 7 + 0.1 X 7 + 0.1 X 7 + 0.1 X 7 + 0.1 X 5 + 0.1 X 5 + 0.1 X 9 6.3 Simple Average 6.2 * Simple average of the above three parameters comes out to 6.2 [(6.6+5.8+6.3)/3] CASH - Component J * Further, cash component is valued as 1. PORTFOLIO RISK-O-METER VALUE: * Hence, the average for the total portfolio is 0.9 x 6.2 + 0.1 x 1 = 5.7 * Since the value of risk is higher than 5, it shall fall into range of Very High Risk. * Therefore, risk-o-meter for the abovementioned equity scheme would be Very High, and shall be as depicted below: C. Multi asset scheme: * Consider a Multi Asset category scheme having 10 securities with following attributes: TABLE 18 Type of security Securities held by the scheme Weight as % of AUM Market Cap Volatility Impact cost Equity A 20% Large Cap 0.01% 0.2% Equity B 10% Large Cap 1.5% 0.3% Equity C 10% Mid cap 2.5% 1.5% Type of security Securities held by the scheme Weig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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