The 2020 SEBI circular that put a speedometer-style riskometer on every mutual fund scheme

On 5 October 2020, the Securities and Exchange Board of India issued circular SEBI/HO/IMD/DF3/CIR/P/2020/197, titled "Product Labeling in Mutual Fund schemes - Risk-o-meter", through its Investment Management Department. It replaced the older product-labelling framework with a single, standardised speedometer-style dial carrying six risk levels, and it made one change that most investors still miss: the risk level has to be recalculated every month from the scheme's live portfolio, not fixed once at launch.

That one sentence is the whole story. Before this circular, a fund's label was effectively a static tag set when the scheme was categorised. After it, the dial can move while you sit still. A liquid fund you bought as "Low to Moderate" can creep up a band if its holdings change, and a small-cap fund you treat as a long-term bet stays pinned at "Very High" for a reason. This Midday Pulse compares the two ends of that dial - a liquid fund versus a small-cap equity fund for a long-horizon wealth goal - and shows exactly how the October 2020 machinery classifies each, taxes each, and why either reading can shift without you lifting a finger.

What the October 2020 circular actually changed

The circular, available in full on sebi.gov.in, defines six risk bands in ascending order: Low, Low to Moderate, Moderate, Moderately High, High and Very High. Under the earlier framework there were effectively five descriptive labels and no common arithmetic behind them; the 2020 regime added a sixth level ("Very High") and, more importantly, a prescribed methodology so that two fund houses scoring the same portfolio arrive at the same band.

The methodology assigns a numerical risk value to the portfolio and maps it onto the dial. Under the circular's annexure, a scheme risk value of 1 or below reads as Low, above 1 to 2 as Low to Moderate, above 2 to 3 as Moderate, above 3 to 4 as Moderately High, above 4 to 5 as High, and above 5 as Very High. The table below is the backbone of everything that follows.

For an equity portfolio the circular scores three parameters and takes a simple average: market capitalisation (large-cap holdings score 5, mid-cap 7 and small-cap 9), volatility, and impact cost as a proxy for liquidity. A portfolio stacked with small-cap names therefore drags the average towards the 9 end and lands in the Very High band, which is why small-cap funds sit there almost by construction. For a debt portfolio the score blends credit risk, interest-rate (duration) risk and liquidity risk, with the liquidity-risk value acting as a floor so a fund cannot look safer than its least tradable holding.

The piece of the 5 October 2020 circular that changes investor behaviour is the cadence. The risk-o-meter must be evaluated on a monthly basis and disclosed, along with the portfolio, within 10 days from the close of each month on the AMC's own website and on the AMFI website at amfiindia.com. Fund houses must also disclose the number of times a scheme's risk level changed over the financial year, and any change in the dial has to be communicated to existing unit-holders by notice-cum-addendum and by email or SMS. So the dial is not decoration; it is a monthly health reading your fund house is legally obliged to republish.

This is also why the band can move while you do nothing. If a short-duration debt fund's manager buys a lower-rated bond, its credit-risk score rises and the dial can step from Moderate to Moderately High at the next monthly reset - no action on your part, a different risk label on your holding. Our earlier analysis of why the benchmark riskometer rarely gets checked covers a related blind spot: since December 2021 the scheme's dial sits next to its benchmark's dial, and the two can diverge.

Side-by-Side Comparison

Set a single goal: building long-term wealth over a horizon of 10 years or more, funded by a monthly SIP. Product A is a liquid fund, typically reading "Low to Moderate" (scheme risk value in the above-1-to-2 band). Product B is a small-cap equity fund, almost always "Very High" (risk value above 5). The dial is telling you something true about each, and the comparison below puts the two readings against each other.

The point of the circular is that these two products are not interchangeable, and the dial says so before any brochure does. A liquid fund's "Low to Moderate" is the correct label for cash you may need inside a few months; using it as your 10-year growth vehicle quietly guarantees you will trail inflation. A small-cap fund's "Very High" is not a warning to avoid it - over a 10-year horizon it is simply the honest price of the return potential - but it is a warning not to hold money there that you will need next year. If you plan to deploy a one-time amount rather than a monthly instalment, model it through the lumpsum calculator and then re-read the dial before committing.

A worked example makes the "it moves while you sit still" point concrete. Suppose in April you hold a corporate-bond fund reading Moderate (risk value 2.4). Over the next two months the manager rotates into longer-duration and slightly lower-rated paper; at the June monthly reset the credit-risk and interest-rate-risk scores push the average to 3.3, and the dial now reads Moderately High. You bought one risk profile and, 60 days later, own another - and the only way you would know is the monthly disclosure the 2020 circular forces onto the AMC and AMFI websites. That is the single most useful habit the circular enables: read the dial monthly, not once.

Tax Treatment

The riskometer band has no bearing whatsoever on tax. Two funds both reading "Very High" can be taxed completely differently, because Indian capital-gains tax keys off a fund's equity exposure, not its dial. Under the Income-tax Act (incometax.gov.in), a fund that holds at least 65% in domestic equity is an equity-oriented fund; one that holds 35% or less in equity is a "specified mutual fund" taxed as debt.

For an equity-oriented fund such as our Product B small-cap scheme, the rates changed with effect from 23 July 2024. Short-term capital gains - units held 12 months or less - are taxed at 20% under section 111A. Long-term capital gains - units held more than 12 months - are taxed at 12.5% under section 112A, after an annual exemption of Rs 1,25,000 of such gains. These figures match Oquilia's central rate configuration and the post-Budget-2024 regime.

Debt-oriented and specified mutual funds are treated differently. For units acquired on or after 1 April 2023, gains are added to income and taxed at your applicable slab rate regardless of holding period, with no long-term rate and no indexation benefit - the Finance Act 2023 position, confirmed on incometax.gov.in. Under the new-regime slabs, that slab rate rises from nil up to Rs 4,00,000 of total income to 30% above Rs 24,00,000, so a debt-fund gain can be taxed at anywhere between 0% and 30% depending on the rest of your income.

Two practical consequences follow. First, a liquid fund (Product A) held as debt is taxed at your slab, so for a 30%-slab investor its post-tax return is materially lower than the headline yield suggests - another reason it is a parking tool, not a wealth engine. Second, an equity-linked savings scheme that also reads high on the dial carries its own extra feature, a three-year statutory lock-in and a section 80C deduction, which you can size using the ELSS calculator. The grandfathering of pre-February 2018 equity gains, covered in our note on the February 2018 FMV rule, still reduces the taxable long-term gain on very old equity-fund units.

Who Should Pick Which

The dial is a matching tool, not a ranking. A higher band is not "worse"; it is a statement about volatility and horizon that should be read against your own goal and timeline. Using the six bands from the 2020 circular, here is how the two products map onto investor profiles.

Pick the liquid fund (Low to Moderate) if your money has a job inside the next 12 months - an emergency reserve of three to six months of expenses, a down payment due next year, or cash staged for a staggered equity entry. The "Low to Moderate" reading is the feature, not a limitation: you are buying stability of capital, and the circular's monthly disclosure lets you confirm the fund has not quietly drifted into a higher band since you invested.

Pick the small-cap equity fund (Very High) only for the portion of your portfolio with a genuine 7-to-10-year-plus horizon and the stomach for a drawdown that can exceed 30% in a bad year without you selling. The "Very High" dial is doing its job by telling you this up front. A disciplined monthly SIP, sized in the SIP calculator, is the standard way to ride that volatility, because it buys more units when the band's underlying volatility works against the price.

Most investors need both, in different buckets, and the mistake the 2020 riskometer is designed to prevent is putting next year's school fees in a Very High fund or a 10-year goal in a Low to Moderate one. A reasonable framing: emergencies and near-term goals in Low to Moderate instruments, core long-term growth in High-band diversified equity, and only a satellite slice in Very High small-cap or thematic funds. Check every holding's dial once a month against the AMFI disclosure, because the band you own today is not guaranteed to be the band you bought.

FAQ

What do the six risk-o-meter levels mean?

Under SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/197 dated 5 October 2020, the six ascending bands are Low, Low to Moderate, Moderate, Moderately High, High and Very High. They correspond to a scheme risk value of up to 1, above 1 to 2, above 2 to 3, above 3 to 4, above 4 to 5, and above 5 respectively, calculated from the scheme's actual portfolio.

How often is the risk-o-meter updated?

Monthly. The 2020 circular requires the risk level to be evaluated every month from the live portfolio and disclosed, with the portfolio, within 10 days of each month-end on the AMC website and on amfiindia.com. Fund houses must also report how many times the dial changed over the financial year.

Why did my fund's risk level change when I did nothing?

Because the dial reflects the portfolio, not your action. If the manager adds lower-rated bonds, longer-duration paper or more small-cap stocks, the monthly recalculation can push the scheme risk value into a higher band - for example from Moderate (2.4) to Moderately High (3.3) - and the fund house must notify you by addendum and email or SMS.

Does a higher risk-o-meter band mean higher tax?

No. Tax depends on equity exposure, not the dial. An equity-oriented fund (65%+ equity) is taxed at 20% STCG under section 111A or 12.5% LTCG over Rs 1,25,000 under section 112A, while a debt or specified fund bought on or after 1 April 2023 is taxed at your slab rate - two funds on the same band can face entirely different tax.

Is a "Very High" fund something I should avoid?

Not automatically. "Very High" describes volatility and horizon, not quality. Small-cap and thematic funds sit there because small-cap holdings score 9 on the market-cap parameter. For money with a genuine 7-to-10-year-plus horizon, the band is the honest cost of the return potential; for money needed next year, it is a clear warning.

Where can I see my fund's current risk-o-meter?

On the AMC's website and on amfiindia.com, updated within 10 days of each month-end as mandated by the 2020 circular, and on the scheme's latest factsheet. Since December 2021 you will also see the benchmark's own dial next to the scheme's, so you can compare the two.

Does the risk-o-meter replace reading the scheme documents?

No. The dial is a single summary reading; it does not tell you the expense ratio, the exit load, or the full holdings. Use it as a monthly screen alongside the scheme information document and portfolio disclosure, and compare it against the fund's benchmark index dial before you decide.