Risk-O-Meter to be applicable on mutual funds investing in commodities; new rules come into force with immediate effect

In a circular, the markets regulator said it has been decided that investment in such commodities by the mutual fund schemes will be assigned a risk score corresponding to the annualized volatility of the price of such commodities.

Sebi on Monday came out with a new framework for evaluating risk level of commodities -- gold and gold- related instruments -- in which mutual funds are permitted to invest on risk-o-meter. Pic:

The Securities and Exchange Board of India (SEBI) on Monday said that the risk-o-meter will also be applicable in mutual funds schemes investing in commodities. The market regulator said in its circular that new rules will be applicable with immediate effect.

The risk-o-meter will be implemented on the basis of 15-year volatility in the benchmark of the commodity, SEBI said.

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How will the calculation be done?
SEBI said that if the volatility in these commodities is less than 10 percent, then the risk will be moderate. Whereas, if there is a fluctuation of 10% - 15%, there will be moderately high risk and if there is a volatility of 15 to 20 percent, there will be a high-risk category. If the volatility is more than 20 percent, it will be kept in the very high-risk category.

Explaining with an example, Sebi said if the price of gold has annualized volatility of 18 percent based on the price of gold of the past 15 years, then gold and gold related instruments will have a risk value of 5 (high) on risk-o-meter, as reported by PTI.

According to PTI, the regulator had said in October 2020 that investment in gold and gold-related instruments by schemes will be valued at 4 from risk perspective. This new framework will come into force with immediate effect, the Securities and Exchange Board of India (Sebi) said.

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